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Commodity exchanges historically have served as private organizations that govern contractual relations between market participants. Their functions have included commodity measurement, contract enforcement, the policing of theft and fraud, and the mitigation of information asymmetries. In contrast to these successes, the Chicago Board of Trade failed signally in its attempt to introduce a grain grading system after the Civil War. This effort failed because (a) the proposed reform imposed significant costs on interests whose cooperation was essential to its success and (b) the transactions costs of reaching an agreement to compensate these interests for their losses under the efficient property rights were prohibitive. A comparison of the successes and failures of commodity exchanges reveals that exchanges succeed when the benefits of exchange governance are symmetric and fail when the costs and benefits are extremely asymmetric.

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