Essay: Cheating pays

Common private-ordering theories predict that merchants have an incentive to act honestly because if they do not, they will get a bad reputation and their future businesses will suffer. In these theories, cheating is cheating whether the cheat is big or small. But while reputation-based private ordering may constrain the big cheat, it does not necessarily constrain the small cheat because of the difficulty in discovering certain types of low-level cheating and the consequent failure of the disciplining power of reputation. Yet the small cheat presents a significant challenge to modern contracting, both between businesses and in the contracts of adhesion imposed on consumers. To encourage private law scholars to address the unique governance challenges posed by low-level cheating, this Essay describes the conditions under which low-level cheating can flourish and become widespread. It demonstrates this so- called “Cheating Pays” scenario using a historical case study in which a seventeenth-century London grocer, trading under precisely those conditions that private-ordering theories predict will incentivize honesty, not only cheated extensively but also successfully remained in business after having been caught and publicly punished. Identifying the scenarios in which cheating pays has implications for how firms use contracts and how consumers might use the courts to try to reduce opportunistic behavior.