Economic transactions, opportunistic behavior and protective mechanisms

Whenever actors participate in transactions they expose themselves to risks of various kinds. Some of these risks are attributable to events outside the control of the participants and are unavoidable. Others originate in, or are aggrevated by, opportunistic actions undertaken by contract partners and other co-operators. This paper is concerned with the latter type of risk and the protection against it. Six protective mechanisms, which may serve as safeguards against opportunistic behavior, are presented and discussed. Special attention is paid to reputation effects. It is noted that such effects may account for the lack of opportunistic behavior with which networks are often credited. No protective mechanism is, however, effective under all circumstances.