December, 2005

Trading With Bandits

  • Peter Leeson

    Senior Fellow, F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics
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Is it possible to trade with bandits? When government is absent, the superior strength of some agents makes it cheaper for them to violently steal what they desire from weaker agents than to use trade to obtain what they want. Such was the case with middlemen who interacted with producers in late pre-colonial West Central Africa. In the face of this threat, producers employed two mechanisms to make exchange with middlemen possible. On the one hand they used credit to alter middlemen’s cost/benefit structure of engaging in plunder versus trade. On the other hand producers demanded tribute from traveling traders as a risk premium. By transforming traveling traders’ incentive from banditry to peaceful trade and reducing producers’ costs associated with interacting with middlemen, these mechanisms enhanced both parties’ ability to capture the gains from exchange.