Trade institutions must solve both an information and a punishment-motivation problem

Evidence

The institution that we model as the resolution of these problems is based on the presence of a specialized actor - a “judge” or “law merchant” (LM) who serves both as a repository of information and as an adjudicator of disputes. The core version of our model is based on the following assumptions. After any exchange, each party can accuse the other of cheating and appeal to the LM. Any dispute appealed to the LM is perfectly and honestly adjudicated at cost C to the plaintiff. — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 79 (#expands, via linked claim)

In the model we develop below, this second problem has multiple aspects. First, traders must be motivated to execute sanctions against Cheaters when that is a personally costly activity. Second, traders must be motivated to keep well enough informed to know when sanctions are required, even though information gathering activities may be personally costly and difficult to monitor. In effect, one who keeps informed about who should be punished for past transgressions is supplying a public good; he deters the traders from cheating against others. Moreover, in our model, no other trader except his current partner will ever know if a trader does not check his partner’s past history, so the trader could avoid supplying the public good without facing any sanction from future traders. Third, traders who are cheated must be motivated to document the episode, even though providing documentation may be personally costly. — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 78 (#exemplifies, via linked claim)

Categorization

• XREF: connects to: Private-judge trading systems succeed only when enforcement costs stay low — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 15; Growing trade raised monitoring costs both within and across communities.; Frequent repeated interaction makes cooperative trade equilibria feasible, whereas infrequent trade does not. (+20 more)

Related

• Bilateral reputation systems fail because information and sanctioning are costly public goods (similarity 0.86)
• A private judge can solve collective punishment problems by centralizing information and adjudication. (similarity 0.86)
• Private-judge trading systems succeed only when enforcement costs stay low (similarity 0.85)
• Centralized adjudicators solve trade by combining information storage with dispute resolution (similarity 0.85)
• Reputation systems fail because monitoring and sanctioning are costly public goods. (similarity 0.84)
• Institutions emerge where information is costly, not where enforcement is absent. (similarity 0.82)
• Growing trade communities face monitoring and one-shot-cheating problems that demand new institutions. (similarity 0.81)
• Full-history information institutions are too costly for efficient trade (similarity 0.81)
• Information about partners’ past behavior is essential for punishing cheaters. (similarity 0.81)
• Informal punishment fails because traders won’t boycott lucrative partners (similarity 0.80)
• Costly information is what breaks informal trade enforcement. (similarity 0.80)
• Disputed quality enforcement ends with exit rather than arbitration (similarity 0.80)
• Costly information, not infrequent trade, is the core obstacle to honest exchange. (similarity 0.79)
• Private trade-enforcement systems fail when wealth transfer is costly (similarity 0.79)
• Long-distance trade needs institutions to fill knowledge gaps about others’ honesty (similarity 0.79)

Broader Connections

• Centralized adjudicators solve trade by combining information storage with dispute resolution #expands (0.88) — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 79
• Rational trust requires both trusted’s incentives and truster’s knowledge #expands (0.84)
• Bilateral reputation systems fail because information and sanctioning are costly public goods #exemplifies (0.80) — PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE OF…, 78