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. After all, from the cheated trader’s perspective, what’s lost is lost, and there may be little point in “throwing good money after bad.” But if players who are cheated are unwilling to invest in informing their neighbors, then, just as surely as if the neighbors are unwilling to invest in being informed, the Cheater will profit from his action and Honest trade will suffer. These are the problems that the trading institution in our model must solve.

XREF: Connects to collective action / free-rider problems in public goods economics, where monitoring and sanctioning are underprovided. QUESTION: What institution design actually solves these three monitoring/sanctioning problems in the model? Builds on: "Institutions must solve the second-order problem of motivating punishment participation."

PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE O…, loc. 78