We now consider in more detail a model of trade in which outsiders cannot readily observe what has transpired in a given bilateral trade. While "disputes" may arise in which one party accuses the other of cheating, none of the other players have a method of freely verifying the parties' claims. Even if the dispute itself can be observed by others, they cannot costlessly determine whether cheating by one has actually occurred or whether the other is opportunistically claiming that it did.

DEFINE: Defines the model's core premise: bilateral disputes are observable but not freely verifiable, so third parties cannot reliably enforce contracts. Builds on: "Long-distance trade requires institutions to enforce honest conduct among strangers."

PAUL R. MILGRO, PAUL R. MILGRO - THE ROLE O…, loc. 68