Reputational Enforcement In a world without legal enforcement of contracts If I break a contract,other people won't want to contract with me A side effect of third parties wanting to protect themselves It depends on their knowing I was the one responsible I claim it was your fault If third parties cannot easily tell,they avoid both of us So you,anticipating that,don't accuse me of breaking the contract And reputational enforcement doesn't work One solution is to lower the information cost to third parties Another is to post a bond with a trusted third party arbitratorReputational Enforcement • In a world without legal enforcement of contracts • If I break a contract, other people won’t want to contract with me • A side effect of third parties wanting to protect themselves • It depends on their knowing I was the one responsible • I claim it was your fault • If third parties cannot easily tell, they avoid both of us • So you, anticipating that, don’t accuse me of breaking the contract • And reputational enforcement doesn’t work • One solution is to lower the information cost to third parties • Another is to post a bond with a trusted third party arbitrator