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Contracts in Cyberspace
phutureboy writes "In his online Journal of Interesting Economics, economist David D. Friedman (son of Nobel laureate Milton Friedman) presents some interesting ideas about the enforcement of contracts in cyberspace. The gist is that he sees a gradual shift away from public enforcement of contracts (i.e. government courts) to private enforcement (e.g. third party arbitration, reputationial enforcement). The rest of his site is interesting as well - he even has an archive of his open-source economics software, which includes a neat trading simulation game called Hansa."
Is forgetting to cancel them before my $2.99 trial membership is over...
Ignore the "p2p is theft" trolls, they're just uninformed
It seems to me that third party contract enforcement is the only way to go. With the internationality of the internet, one single governmental entity isnt going to be able to take care of matters that may arise. Besides the fact that they have more important things to concern themselves with, they would most likely be out of their jurisdiction.
On a seperate note, if this whole third party thing does progress, it may be an interesting buisness in get involved in. Either as an investor, or as a "contract enforcer" if you will. heh
Whoa, Friedman made Slashdot. Not bad.
:-)
Dr. Friedman is quite a character -- I was lucky enough to chat with him a couple times; he teaches at Santa Clara University and by some peculiar twist of fate I now possess a degree from there. So we ended up going to the same talks every once in a while -- quirky guy, occasionally reminds you of the late 90's when people really acted like the Internet Was Going To Change Humanity or something.
Friedman's paper is overall pretty reasonable, but his calculations seem to ignore the *tremendous* nonlinearity in our responsiveness to bad news. Ten people can tell you a restaurant is good, but if one says it's bad, you're probably not going to eat there. Paypal can pass a million good transactions a year, and it only takes a couple thousand questionable ones to really make a visible impact on their quality of service. Simply having one's reputation questioned tarnishes it -- indeed, one reason so many cases settle, or go to binding arbitration, is to keep major conflicts quiet.
It's in this context that arbitration servers have a problem. If they downgrade reputation as humans do, those who are downgraded may complain -- with apparent statistical cause -- that their otherwise good service is being mucked up by the inevitable screwups. But if they *don't*, their data is quite useless relative to the weighing the human mind does, and nobody would ever trust them.
Now, as an economist, Friedman would probably use this as an example of how humans are irrational...I doubt that. Consider the nonlinearity a form of damage multiplication...one transaction may be tweaked to make more money, but this will impact a hundred other transactions, that will thus cause a net loss of money. This means nobody can be screwed over -- everyone must get fair service. Without nonlinearity, it's always worthwhile to screw 1-5% percent of your clientele.
The news have it right -- bad news is much more interesting, and it should be.
For what it's worth, I do suspect that a cross-jurisdictional system will spawn to handle global commerce, and I think it'll be a combination of Friedman and Visa. Anonymity in financial transactions is pretty doomed -- we've just gotten accustomed to handing over our wallet, and hoping we get it all back -- but my expectation is that person-to-person cash transfer over distance will be formalized, arbitrated, and most of all -- insured. There will be reputational work, but it'll be in the same context we already have institutionalized reputations -- credit checks. It's *much* more likely that we'll see ebay feedback on your Visa web page than we'll see some funky distributed arbitration notices system.
Visa, you see, has one major advantage: The arbitration systems that Friedman describes are great for stopping the *next* fraud, but they don't do anything about *this* one. This is the big deal about government, folks -- they may not prevent crime directly, but they sure as hell respond to it. It's not like there's a murder, and the cops are like, wow, we better prevent any gun stores from letting this guy in, but that's all we can do
Yours Truly,
Dan Kaminsky
DoxPara Research
http://www.doxpara.com