5 - Anonymous Exchange, Mixed Enforcement, and Vertical Integration

Summary

INTRODUCTION

In the discussion that follows, I use the terms “agreement” and “contract” in very specific ways that require definition.

Definitions.Agreement: A relationship that encompasses the entire agreed-upon interactions of a transaction.

Contract: An agreement, or part of an agreement, that the state takes on itself to enforce and adjudicate.

By these definitions, then, the scope of the state will increase with an increase in the extent of contracting.

In this chapter, I claim that, as a rule, the state enforces only the contractual components of individual transactions; transactions, as a rule, have additional attributes, and these are enforced by other means. As is obvious, I predict that a decrease in the cost of contracting will induce transactors to cover more of the commodity attributes in their contracts. I also predict that a decrease in that cost will generate a number of more “macro” effects:

1. Legal delineation and anonymous exchange will become more common.

2. The level of vertical integration (defined later) will decline.

3. The extent of the market and the role of the state will increase.

By the model here, then, the cost of contracting and the precise contents of agreements can significantly affect the scope of the state.

Discussing first anonymous exchange, I argue that when information is costly, only caveat-emptor transactions meet the conditions for anonymity, and only these are enforced fully by the state. The state never enforces entire non-caveat-emptor agreements; other enforcers enforce part or all of such agreements. The nature and the consequences of mixed enforcement, tightly wound with vertical-integration issues, occupy the rest of this chapter.