I consider markets in which participants have very little information: For instance, agents are anonymous, cannot verify each other’s identities, or have little information about each other’s past transactions. I ask whether it is possible to prevent opportunistic behavior in such settings in the absence of contractual enforcement. I model such markets as repeated anonymous-random-matching games and show that cooperation is sustainable if players are sufficiently patient and can announce their name (though unverifiable) before every transaction. Cooperation is achieved by “community responsibility”: If a player deviates, her entire community is held responsible and punished by the victim. Sustaining cooperation involves partial authentication of identities by checking players’ knowledge about past transactions.
ASJC Scopus subject areas
- Economics and Econometrics