By Timothy M. Frye
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Extra info for Brokers and Bureaucrats: Building Market Institutions in Russia
We usually view the state as the organization that enforces contracts and provides the cornerstone for social order. Acting as the third party to all contracts, the state raises the costs of cheating above the gains by threatening coercion against those who violate contracts. In many instances, however, the threat of state enforcement is not credible. In countries with weak judicial systems, disorganized bureaucracies, or ineffective regional governments' the state often lacks the capacity to be a neutral third-party enforcer 17 18 Brokers and Bureaucrats of many disputes.
In the absence of reliable third-party enforcement, farmers in a commonly held irrigation system and states abiding by an international arms control agreement can gain individually by not violating rules. To reduce cheating, states in the international arena and domestic agents managing common-pool resources often try to create SGOs that identify rogue members, resolve disputes, and levy sanctions without resorting to a third-party. Table 2 distinguishes SGOs from other common forms of organization.
Perhaps more important, the state may delegate the authority to make binding decisions to an SGO arbitration court. This formal authority can substantially increase the power of the SGO by raising the costs of noncompliance for cheaters who can no longer appeal the decision in state courts. Second, state agents may delegate resources that reduce the costs of sharing information among group members. These resources may include identifying potential members, allocating a meeting place, providing consumer hodines, public bulletin boards, and state-backed rating agencies that share information on the trading practices of group Inembers within a particular 36 Brokers and Bureaucrats community.