Anarchy, Monopoly, and Predation
Journal of Institutional and Theoretical Economics, Vol. 163, No. 3, 2007
Posted: 10 Jan 2007 Last revised: 28 Jul 2010
Date Written: July 28, 2010
The 'folk theorem' suggests that the shadow of the future coupled with the threat of lost business can create cooperation without government. Although institutions rooted in this theorem can support self-enforcing exchange in a wide variety of contexts, their potential to create cooperation is not limitless. In particular, the folk theorem may break down when some agents are physically stronger than others. Stringham's (2006) system of vertically integrated proprietary communities relies on the folk theorem to prevent proprietors from preying on their customers. I show that while innovative, this system does not work. A monopoly proprietor maximizes profits by optimally extorting his tenants in violation of voluntary contracts. The result is a predatory rather than voluntary system.
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