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The crucial role of financial intermediaries for facilitating trade among strangers

Author

Listed:
  • Edward Peter Stringham

    (Davis Professor of Economic Organizations and Innovation
    American Institute for Economic Research)

  • J. R. Clark

    (The University of Tennessee at Chattanooga, Probasco Distinguished Chair of Free Enterprise)

Abstract

How are markets possible under conditions of anonymity and lack of repeat dealing? Many scholars consider the problem of fraud as one that must be dealt with by law, but electronic commerce firms treat the problem of online fraud as a business problem, a problem of risk management. This article documents how merchants and financial intermediaries treat fraud as a cost that can be quantified and then minimized. Just as entrepreneurs earn profits by helping meet a previously unmet market demand, entrepreneurs earn profits by helping reduce what could have been considered an unsolved legal problem. Firms have profited by using predictive analytics and various if-then algorithms to help mitigate what might otherwise be an intractable problem and help vastly expand the scope of commerce.

Suggested Citation

  • Edward Peter Stringham & J. R. Clark, 2020. "The crucial role of financial intermediaries for facilitating trade among strangers," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 33(3), pages 349-361, September.
    • Handle: RePEc:kap:revaec:v:33:y:2020:i:3:d:10.1007_s11138-018-0429-0
    DOI: 10.1007/s11138-018-0429-0
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    References listed on IDEAS

    as
    1. Boettke, Peter J. & Coyne, Christopher J., 2009. "Context Matters: Institutions and Entrepreneurship," Foundations and Trends(R) in Entrepreneurship, now publishers, vol. 5(3), pages 135-209, March.
    2. M. Martin Boyer, 2007. "Resistance (to Fraud) Is Futile," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(2), pages 461-492, June.
    3. Stringham, Edward, 2003. "The extralegal development of securities trading in seventeenth-century Amsterdam," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(2), pages 321-344.
    4. Yuanfeng Cai & Dan Zhu, 2016. "Fraud detections for online businesses: a perspective from blockchain technology," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 2(1), pages 1-10, December.
    5. Jessica Livingston, 2008. "Founders at Work," Springer Books, Springer, number 978-1-4302-1077-1, September.
    6. Stringham, Edward Peter, 2015. "Private Governance: Creating Order in Economic and Social Life," OUP Catalogue, Oxford University Press, number 9780199365166.
    7. Benjamin Powell & Cortney Stephen Rodet, 2012. "Praise and Profits: Cultural and Institutional Determinants of Entrepreneurship," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 27(Spring 20), pages 19-42.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Peter C. Earle & Max Gulker & Edward P. Stringham, 2022. "Decentralized Marketplaces with Privately Enforced Contracts: A Case Study of OpenBazaar," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 37(Winter 20), pages 43-59.

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    More about this item

    Keywords

    Innovation; Fraud prevention; Payment processing; Credit cards; Predictive analytics; Blockchain; Smart contracts;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
    • P17 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Performance and Prospects

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