Keeping Everyone Honest
THE ROLE: The Enforcer makes sure buyers and sellers put forth full effort, cooperate, and stay honest. When they run two-sided networks, where the behavior of one side can have positive or negative effects on the other side, Enforcers understand the importance of designing and upholding rules that will create a more valuable network. Therefore, they watch over their partners’ dealings, parlay their relationships, and establish shared standards for good behavior.
Why Services Require Enforcers
When you’re selling goods, being a Certifier is enough—you can vouch for the quality of the Prada handbag or the Ben Franklin-era sailboat because these products’ quality is not going to change before it reaches your buyer. Not so with services: regardless of service providers’ underlying ability, they can decide how much effort to put in and how honestly to conduct business. Sussing out hidden information about sellers, as Certifiers do, won’t protect buyers from shirking and cheating, problems that can come up after buyers sign on the dotted line. These problems of shirking and cheating, variously called moral hazard, postcontractual opportunism, or hidden action1—are especially acute when a player’s actions are hidden and when buyers and sellers don’t have an ongoing relationship. An ongoing relationship can protect against such problems, as long as the future value of the relationship is higher than the gains from cheating or shirking today. The lack of such a relationship, on the other hand, gives players an incentive to act opportunistically. This isn’t to say that everybody or even most people will cheat or shirk—but even if there are only a few bad apples, would-be trading partners don’t necessarily know who they are. For buyers and sellers to trust each other under those conditions, they need to know that someone—a third party— will reliably and fairly enforce the contract. That’s the job of the middleman I call the Enforcer. Whereas Certifiers protect against the precontractual problems of hidden information, Enforcers protect against the postcontractual pitfalls of hidden action.
The word “enforcer” can evoke images of violent criminals who are only looking out for their own good, the sorts of characters we see in Breaking Bad and The Sopranos. It’s no accident that Enforcers, as we usually think of them, are prevalent in the illicit economy: because buyers and sellers in the underworld can’t turn to the courts to enforce contracts, they need a system of private enforcement. In these settings, middlemen who play the Enforcer role become indispensable.2 But although they often resort to violence or the threat of violence, violence isn’t the point. The sociologist Diego Gambetta, in his study of the Sicilian mafia, argued that the mafia’s stock-in-trade is genuine protection—not a protection racket in which the mafia extorts money from business owners, but an actual service offered in the absence of an effective system of public justice.3
I argue in this chapter that any situations that provide reasons for buyers and sellers to be unsure of one another creates a need for Enforcers—in noncriminal environments and among people who mean well and even when both sides do have legal recourse.
Nonetheless, to best understand the way Enforcers serve both sides, and to see how this role works in concert with that of the Certifier, it helps to look first at middlemen in an illegal industry.