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

238 Laurence S. Mossall self-conscious nations possess or desire nation-states. Some claim only localautonomy or entrenched rights within a broader multiethnic state.(Mann 2005: 11)5 The first number in any cell is the “payoff” to the personality type designated by that rowof the table. The number after the semi-colon is the “payoff” to the personality typedesignated by the column heading.6 The use of the term “util” is shorthand for an abstract idea widely held by economiststhat there is some unit in which subjectively perceived payoffs might be expressed thatmakes changes in levels of satisfaction between and among peoples comparable or atleast subject to measurement. This abstraction is simply an aid to reasoning and ishelpful when fixing ideas and making important distinctions. It allows us to discuss the“gains from trade” in relation to our distinction between honest types and rogues.7 Let p represent the probability that a randomly chosen person from a bivariate popu lationdivided between D-types and C-types is a “C-type.” Now, the relationship betweenp and the moral composition of the population, D/C, is as follows:p = C/D+C = 1/D/C + 1.8 When a C-type trades with a D-type, the C-type averages 5. When a C-type trades withanother C-type, the gain is 25. Clearly, C-types avoid trading with D-types because it isless profitable to get involved with them.9 The expected utility or payoff for a C-type assuming repeated random drawing oftrading partners (with replacement) is:EU C = 25p + 5 (1 – p).The expected utility or payoff for a D-type assuming the same conditions is as follows:EU D = 40p + 10 (1 – p).It can be seen by inspection that the EU of the D-types is larger for all values of p than theEU of the C-types.10 The Third Case Scenario is one that falls between the First and Second Case Scenarios.An equilibrium D/C ratio will be reached. Since it is ignorance about the moralcharacter of trading partners that creates the trade risk, let us make that informationavailable at a cost. Now we invent a hypothetical insurance agency from which traderscan purchase a guarantee, either that they will not be trading with a D-type (on their nexttrade) or else that, if by bad luck they do end up trading with a D-type, the agency willcompensate them for their loss and provide them with the same extra benefits that theywould have enjoyed had they traded with the C-types. This insurance service, however,costs X dollar per trade; from this we can deduce that the C-types will find it economicalto purchase the guarantee service so long as their certain net gain, 25 – X, is larger thantheir expected gain from not purchasing the insurance and taking a chance that they willnot end up trading with a D-type, that is,25 – X > 25p + 5 (1 – p).The C-type will be indifferent between purchasing the guarantee service and “rolling thedice” and risking trade with a D-type, when25 – X = 25p + 5 (1 – p).This implies that if the proportion of D-types to C-type were, say, 1 /3, the guaranteeservice could not charge more than 5 (x = 5) if it expected to attract any business from theC-types. If the risk of trading with a C-type fell lower than 0.75, then C-types wouldactively access the guarantee service at a price of 5.11 According to one analyst, “the Rwandan Tutsis had traditionally dominated both power