Theorem 3 shows that the LM system restores cooperation even when the players know little about their partners' histories. There are transaction costs necessary to maintain this system, however: That the average payoff per period is 1 - Q reflects the transaction cost of Q per period incurred by each trader to support the Law Merchant system.

Builds on: "LM-governed systems stay honest when future trades matter enough"

PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE O…, loc. 125