Conditions (7)-( 10) show the relationship among the various parameters for the LM system to support the efficient cooperation. Each corresponds to one of the problems we described in introducing the model. Condition (7) requires that Cheating and then paying a judgment not be profitable; put simply, the judgment must be large enough to deter Cheating. Condition (8) requires that judgments exceed the cost of an appeal, that is, the judgment must also be large enough to encourage the injured party to appeal. Otherwise, information about Cheating will never reach the LM and Cheating will go unpunished. The two previous conditions require that the judgment be large enough, but condition (9) requires that it not be so large that the Cheater would refuse to pay, for then the injured party would not expect to collect, and so would find it unprofitable to appeal. Notice that the feasibility of satisfying all these conditions simultaneously depends on the technology of wealth transfer summarized byf. If the traders live at great distances from one another and if their principal asset holdings are illiquid (such as land and fixed capital, or reputation and family connections), then wealth transfers may be quite costly (f(J)/J may be large) and the fines required by the LM system then will not work.

QUESTION: The upper and lower bounds on judgment size (deter cheating, but not so large the cheater refuses to pay) suggest an interesting Goldilocks problem for institutional design. What happens when clear deterrence and collectability can't be satisfied simultaneously?

PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE O…, loc. 118