Exchanges may be mutually beneficial and yet never occur because of the Prisoner’s Dilemma. If one party can costlessly renege on its promises after the other party has performed, the observed equilibrium will often be universal defection without any mutually beneficial cooperation. One of the greatest benefits of laws and courts is that there mere potential of suing for breach of contract is enough to move us to the cooperative equilibrium without even requiring very many such suits.
Some contracts for mutually beneficial exchange, such as those between drug buyers and sellers, prostitutes and their clients, or illegal immigrants and their employers, the law refuses to sanction for reasons sometimes good, but almost invariably bad.The author is not even certain that as a judge he would refuse to enforce a murder-for-hire contract. The remedy in that case would of course not be specific enforcement of the contractual obligation to murder, but money damages from the delinquent hitman to the boss. As at this point, both would most likely find themselves behind bars for a very long period based on the boss’s confession (i.e., his complaint in the contract suit), that would be unlikely to create many harmful incentives. That these transactions nevertheless occur with some frequency shows that absence of legal sanction and enforcement does not always doom a market to collapse from universal defection.
Some types of cooperation, for example, where both parties perform nearly simultaneous and proportionately (think of most employment or apartment rental contracts), are essentially self-enforcing because neither party risks more than the tiny most recent increment of its performance to defection. If such contracts could not be enforced at law, little would change. In other situations, a party’s known regard for its general reputation or interest in repeat business can be enough to escape the trap of universal defection.
The law, however, does not confine itself to mere non-enforcement of disfavored contracts. It also often creates criminal sanction, of various severity, for those who have been found to engage in such exchanges. This has underappreciated, perverse consequences:
Such criminal punishments give to each of the parties an option to punish defectors; just tip off the authorities. This option to punish defectors can serve to create trust and hence enhance the volume of trade, just as effectively as the option of suing for breach of contract can for legally sanctioned exchanges. There is no general way to judge whether this trade-enhancing effect of criminal sanctions outweighs the direct disincentive effect; surely the balance must have been on either sides in various circumstances.
A law-maker more ingenious than one generally observes and genuinely intent on suppressing the disfavored trade, would use, rather ignore, the law’s effect on trust in the trade. Clever laws which reward defection can destroy trust in any disfavored trade so completely that it must collapse.
For example, a law-maker who genuinely wanted to end illegal immigration and induce current illegal immigrants to return to their home countriesThis is not a sentiment or motivation which should be attributed to the author. would not invest in costly, cumbersome, and likely ineffective devices like a wall along the southern border or mandatory E-Verify. Rather, in addition to eliminating criminal sanctions for the illegal workers and their employers, the law would provide for a small, but not insubstantial, bounty for every illegal employee turned in by his employer.
The consequence would be a rapid collapse of the market for illegal immigrant labor. Even if most employers (either out of ethical concerns or because the use of the illegal labor is just more profitable than the bounty) would not turn in their employees, some would. To the prospective illegal immigrant laborer the category a potential employer falls into would be completely opaque. The category may even change over time: Seasonal employers may reap a windfall by reporting their employees when the season ends. Employers with business that are starting to fail, may use reporting to soften their landing.
It seems hard to imagine any reputational or other mechanism that could prevent the collapse of the market. This collapse would likely be so fast that very few bounties would have to be paid. And with the collapse of the market for illegal immigrant labor, there would be no more incentive for large-scale illegal immigration and most current illegal immigrants would be forced to return to their homes, or at least a more hospitable exile, because there are few illegal immigrant idle rich.The author may at some point have been such a rara avis.
Some opponents of illegal immigration may recoil at this proposal and suggest alternatives.
Could the law not instead reward defection by the employee and punish the employer? In principle, that could be just as effective. But as almost all illegal immigrants either have an employer to report, or have a family member who can, and the rewards would have to include at least a green card (or a very large sum of money), this would result in a complete amnesty for almost all current illegal immigrants, something illegal immigration opponents generally disdain.
There is also the problem of legal proof. Many illegal immigrant workers will have presented to their employers forged identifications and in court the employer will claim to have credited these forgeries. The best witness to the contrary will be the illegal immigrant who presented the forgery. But the prospect of defending a witness on the grounds that he is now telling the truth about having lied before, rather than lying about having told the truth before, is not one most lawyer’s cherish.
Or could the law not create a private right of action for displaced workers against employers of illegal immigrants? Perhaps, but, just like criminal sanctions, it would strengthen, not weaken, the trust between illegal immigrant laborers and their employers. It presents the same problem of proof that the employer knew that the employee was not authorized to work and adds to it the difficulty of proving that the plaintiff, but for the illegal immigrants, would have been—let’s say—a farm laborer. And most of all, it offends the sound and hallowed legal principle that competition is never a tort.See Case of Gloucester School, 11 Hen. IV. 47 (1410).
None of the alternatives to employer bounties would be nearly as hideously effective. So perhaps one should be grateful that politicians are generally either too dim or too dishonest regarding their motives to embrace this simple and effective solution.
