Econometrica: Mar 2003, Volume 71, Issue 2

On Modes of Economic Governance
p. 449-481

Avinash Dixit

I consider transactions involving asymmetric prisoners’ dilemmas between pairs of players randomly selected from two large populations. Games are played repeatedly, but information about cheating is not adequate to sustain cooperation, and there is no official legal system of contract enforcement. I examine how profit–maximizing private intermediation can supply the information and enforcement. I obtain conditions under which private governance can improve upon no governance, and examine why it fails to achieve social optimality.

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