Money and Markets: Essays in Honor of Leland B. Yeager

228 Laurence S. MossThis table requires some additional explanation. When C-types trade with eachother, they produce the results that are discussed in nearly every textbook on economics.Their mutual gain is derived from the process of specialization and exchangein accordance with comparative advantage. These gains are real and constitute thecore of orthodox economic analysis (Yeager 2001: 6). In the case of bilateralmonopoly, they split the gains in accordance with their relative bargaining power.There is nothing peculiar or unusual about this result in our model: It is standardeconomic analysis. It is the introduction of the D-types that presents the problem.They encumber trade with opportunism, false promises, deception, and constantself-dealing to the point where the C-types always come to regret that they tradedwith them in the first place. The C-types lose in two different ways. First, they knowthey would have done better trading with other C-types, and so they have incurredan opportunity cost by trading with the D-type. Second, they once in a while regretthe exchange when a D-type successfully completes a scam or fraud and their utilitygain turns negative! When a D-type trades with another D-type, they stir up somuch distrust and make so many demands for repeated authentication of everyrepresentation each makes to the other that the gains from trade are dissipatedamong lawyers, accountants, and various experts. Somehow the D-types net, onthe average, 10 utils each trade, but how much better could a D-type have done iftrading with a C-type!The D-type is not discussed in the orthodox economics literature, although inrecent years the trend in certain subfields of economics has been to devote sometime and attention to opportunistic behavior (Williamson 1975). Outside of thesesubfields and specialties, it is common in the textbook literature to assume that alleconomizing agents are honest in the sense that they are committed to living withintheir (notional) budget constraints and/or that information is freely available to alland that problems of asymmetric information of intentional misrepresentation are“exceptions” or minor aberrations in market settings (Leijonhufvud 1981). In ourmodel of C-types and D-types, we depart from the benign self-interest approach toa more descriptively realistic approach that allows the opportunistic agent full reinto antagonize the economic welfare of the rest of society.Let us now follow Robert Frank, who suggested a dynamic principle of evolutionthat might illuminate how the composition of the population in a region changesover time (Frank 1988: 56–65). Suppose that changes in the ratio of D-types to C-types in the population – what I shall call the “ethical composition” of thepopulation – depends on the relative payoffs accruing to the D-types. When theD-types do better on average than the C-types, they multiply more quickly. Thecomposition of the population then shifts in favor of the D-types (the D/C ratiorises), making it more likely that a trader will encounter a D-type on his next trade. 7When the C-types do better than the D-types, then they procreate more rapidly andthe D/C ratio falls.From the payoffs presented in the table, it is immediately obvious that a C-typewould avoid trading with a D-type if he could costlessly “see one coming.” 8 If thatwere the case, then we would have D-types trading only with other D-types, and thecomposition of the population would steadily shift in favor of the C-types, who gain