A good deal of literature on transaction costs takes enforcement as a given, assuming either that it is perfect or that it is constantly imperfect. In fact, enforcement is seldom either, and the structure of enforcement mechanisms and the frequency and severity of imperfection play a major role in the costs of transacting and in the forms that contracts take. There are two reasons why enforcement is typically imperfect. The first takes us back to the preceding chapters that explore the costs of measuring the multiple margins that constitute contract performance. The second rests in the fact that enforcement is undertaken by agents whose own utility functions influence outcomes.

In Chapter 4, asymmetries of information held by principals and agents about the valuable attributes of what was being exchanged were examined in the context of the wealth-maximizing behavior of the parties to exchange. In this chapter I wish to extend that analysis to explore the problems that arise in the transfer of rights. Parties to an exchange must be able to enforce compliance at a (transaction) cost such that the exchange is worthwhile to them. On the face of it, the problem sounds simple. Surely the gains from trade, which economists take to be the bedrock of economic performance, should make it worthwhile to evolve cooperative solutions among parties to capture jointly those gains. Indeed under certain circumstances, as I have noted in earlier chapters, the issues are so resolved. Trade does exist, even in stateless societies.