Private Sources of Trust and Recourse: Prerequisites for the Successful Emergence of Markets in Cyberspace

By Benson, Bruce L. | Journal of Private Enterprise, Fall 2000 | Go to article overview
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Private Sources of Trust and Recourse: Prerequisites for the Successful Emergence of Markets in Cyberspace


Benson, Bruce L., Journal of Private Enterprise


Introduction: a lack of trust in emerging markets and the potential role of law

The availability of low-cost, high-speed computing, along with several other innovative developments such as computer networking that creates the possibility of "cyberspace" (the linking of numbers of people as if they were meeting in physical space), offers a way to conduct business trades (and many other kinds of transactions) almost instantaneously and at very low costs (Bennett, 1999a:l) These technological advances would appear to be so significant at lowering trading costs, that cyberspace should become a primary location for international commercial transactions. And commerce is expanding on the internet at a substantial rate. Small-scale Cyberspace transactions (retailing) certainly is developing, and many firms that have established reputations in real-space commerce are employing the internet to reduce transactions costs. However, the potential for rapid expansion of largescale trade through Cyberspace, particularly by new firms, may be constrained, as much of the Cyberspace economy can be described as a "low-trust society" (Bennett, 1998: 1). Trust certainly can evolve to support trade, as explained below, although under some circumstances it can be limited to relatively small trading communities. Thus, recourse in the form of third party dispute resolution and sanctions against breaches of contract may be necessary as a substitute for trust in order for some types of large-scale trade to emerge in the cybereconomy. If trust relationships prove to be difficult to establish then an important question becomes, how should recourse be provided to facilitate the emergence of even more cypberspace commerce?1

If a legal system can be called upon to resolve contractual disputes and sanction breaches, then promises may be credible even in the absence of trust. Not surprisingly, many observers are advocating increased government involvement to provide law and order for Cyberspace (although many of them are less concerned with contract enforcement than with issues like pornography, tax avoidance, transactions in illegal commodities or services like gambling, etc.)2. In reality, however, less state involvement in commercial law is called for at this stage of market development, not more (Benson, 1998b, 1999b, 1999c, 200Ob). This does not mean that commercial law may not be required, but as explained in Benson (1999b), it means that the commercial law should be established by institutions other than the state. The following presentation explains that the same non-state sources of law that are likely to be more effective at supporting trade in international trade and in the emerging market of geographic space (Benson 1999b, 1999c) are also likely to be more effective in cyberspace (Benson 200Ob) a polycentric system of customary law. Before doing so, however, the means by which trust evolves are briefly discussed in section II in order to emphasize that trade can occur without law, and therefore, that recourse is in fact a substitute for trust. Customary law is described in Benson (1999b) and its use in international trade is discussed in order to iDustrate how it works (e g., what the institutions for resolving disputes and sanctioning law breakers are). section III simply focuses on the potential for customary law arising in emerging markets of cyberspace.

Potential sources of trust in cyberspace

If the "full knowledge" assumption of neoclassical price theory is adopted, there is no reason to worry about institutions that facilitate trade. If traders know everything there is to know about their trading partners' products and there is no uncertainty about the future, all promises are credible and no one can be cheated. In such a zero information and transactions cost world, property rights do not even have to be assigned, since efficiency will prevail and rights will simply arise through the costless bargain (Coase, 1960).

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Private Sources of Trust and Recourse: Prerequisites for the Successful Emergence of Markets in Cyberspace
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