A Theory of Stateless Commerce

Stateless commerce refers to the persistence of private, reputation-based mechanisms for enforcing contracts even in modern economies where public courts are reliable. In several industries—including the diamond trade—businesses deliberately choose to govern transactions outside the legal system, relying instead on informal sanctions such as exclusion from future exchanges. This challenges standard assumptions in economics that market exchange depends on third-party enforcement. Transaction cost economics helps explain this choice: when legal enforcement is costly or unreliable, firms or private ordering can step in. Firms solve enforcement issues by internalizing transactions, but doing so reduces flexibility and introduces inefficiencies. Private ordering offers a hybrid: it provides contractual security and strong incentives while preserving market responsiveness. However, it also raises entry barriers and may foster collusion. The resulting framework introduces a three-variable model—market incentives, transactional security, and entry barriers—to assess the suitability of firms, markets, or private ordering for a given context. Applied to the diamond industry, the model explains why this sector favors private ordering: legal enforcement is ill-suited to the nature of transactions, vertical integration would reduce necessary market responsiveness, and innovation is limited, making entry barriers less costly.

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