When we trade, we transfer property rights to another person. To do this, we make a contract. Unless it is a spot trade – i.e. good and payment are exchanged simultaneously – reneging is possible. The seller may take the payment and not give the good, or the buyer take the good and not pay. So contracts need to be enforced. If they are not, people will not trade, even though exchange could profit both them and the wider economy.

Contract-enforcement problems exist everywhere, but are particularly acute in trade across long distances or political frontiers. To solve them, merchants use institutions – formal and informal – to reduce the probability that their trading partners will renege on agreements.