Economic actors often face the following dilemma: what do you do when external enforcement is lacking or when relying on courts is too costly? This chapter introduces the topic and summarizes the main findings in the existing research. Many economists would predict widespread cheating, but Private Governance makes the case that private parties have incentives to overcome prisoner’s dilemma problems with diverse mechanisms of private governance, including sorting, reputation, assurance, bonding, and various forms of ex ante risk management. Focusing on actual solutions rather than hypothetical solutions allows us to see rather than speculate about how markets can solve problems. Private governance solves problems in simple markets as well as in the most sophisticated markets the world has ever seen.
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