Symmetric Third-Party Governance of Trades∗

This paper studies individual incentives to pay to the fixed cost of an impartial contract enforcement institution. If agents do not collect enough resources, they could still enforce their trades through an asymmetric enforcement system, where only resourceful agents are able to punish their encounters for cheating. The main results are: (i) When the impartial system excludes non-contributors, even resourceful agents, who prefer asymmetric governance to be the only available mode for everyone in the population, would pay to the fixed cost; however there are also equilibria where two modes co-exist in equilibrium, i.e., some resourceful agents remain under asymmetric governance. (ii) The asymmetric governance mode improves upon a regime with no punishment at all, but there is always a positive rate of cheating within contracts; consequently, on aggregate it is a sub-optimal regime as compared to the impartial system under which the rate of cheating is zero.