In complete information settings, institutions are frequently unnecessary because decentralized enforcement is sufficient to police deviations. However, this conclusion fails in environments where information is incomplete or costly. In the context of our model, the Adjusted Tit-for-Tat strategy requires that a trader know his current partner's previous history. When such information is difficult or costly to obtain, decentralized enforcement mechanisms break down. Institutions like those of the Law Merchant system resolve the fundamental problems of restoring the information that underpins an effective reputation system while both economizing on information and overcoming a whole array of incentive problems that obstruct the gathering and dissemination of that information.

DEFINE: Positions a theory of why institutions like the Law Merchant system exist — they restore reputation signaling where information is expensive. Builds on: "State contract enforcement mainly lowers transaction costs of policing."

PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE O…, loc. 177