The Crucial Role of Financial Intermediaries for Facilitating Trade Among Strangers

Originally published in The Review of Austrian Economics

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.

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