CHICAGO JOURNALS Coordination,Commitment,and Enforcement:The Case of the Merchant Guild Author(s):Avner Greif,Paul Milgrom,Barry R.Weingast Reviewed work(s): Source:Journal of Political Economy.Vol.102,No.4 (Aug.,1994),pp.745-776 Published by:The University of Chicago Press Stable URL:http://www.jstor.org/stable/2138763 Accessed:12/02/201205:30 Your use of the JSTOR archive indicates your acceptance of the Terms Conditions of Use.available at http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars,researchers,and students discover,use,and build upon a wide range of content in a trusted digital archive.We use information technology and tools to increase productivity and facilitate new forms of scholarship.For more information about JSTOR,please contact support@jstor.org. The University of Chicago Press is collaborating with JSTOR to digitize,preserve and extend access to Journal of Political Economy. STOR http://www.jstor.org
Coordination, Commitment, and Enforcement: The Case of the Merchant Guild Author(s): Avner Greif, Paul Milgrom, Barry R. Weingast Reviewed work(s): Source: Journal of Political Economy, Vol. 102, No. 4 (Aug., 1994), pp. 745-776 Published by: The University of Chicago Press Stable URL: http://www.jstor.org/stable/2138763 . Accessed: 12/02/2012 05:30 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. The University of Chicago Press is collaborating with JSTOR to digitize, preserve and extend access to Journal of Political Economy. http://www.jstor.org
Coordination,Commitment,and Enforcement:The Case of the Merchant Guild Avner Greif,Paul Milgrom,and Barry R.Weingast Stanford University We interpret historical evidence in light of a repeated-game model to conclude that merchant guilds emerged during the late medieval period to allow rulers of trade centers to commit to the security of alien merchants.The merchant guild developed the theoretically required attributes,secured merchants'property rights,and evolved in response to crises to extend the range of its effectiveness,contrib- uting to the expansion of trade during the late medieval period.We elaborate on the relations between our theory and the monopoly theory of merchant guilds and contrast it with repeated-game theo- ries that provide no role for formal organization. One of the central questions about the institutional foundations of markets concerns the power of the state.The simplest economic view of the state as an institution that enforces contracts and property rights and provides public goods poses a dilemma:A state with suffi- This paper was originally prepared for the conference on Economic Policy in Politi- cal Equilibrium,June 14-16,1990.We thank Yoram Barzel,Douglass C.North,Jean- Laurent Rosenthal,Nathan Sussman,and an anonymous referee for helpful com- ments;Esther-Mirjam Sent and Joshua Gans for editorial assistance;and the National Science Foundation for financial support.The participants at the conference on Mar- kets and Organizations organized by the Center for Economic Research at Tilburg and seminar participants at the University of California at Berkeley,Boston University, Indiana University,the University of Illinois at Urbana-Champaign,Harvard Univer- sity,the Hebrew University,Stanford University,and Tel-Aviv University contributed helpful comments. [Jourmal of Political Economy.1994,voL 102.no.4] 1994 by The University of Chicago.All rights reserved.0022-3808/94/0204-000350150 745
Coordination, Commitment, and Enforcement: The Case of the Merchant Guild Avner Greif, Paul Milgrom, and Barry R. Weingast Stanford University We interpret historical evidence in light of a repeated-game model to conclude that merchant guilds emerged during the late medieval period to allow rulers of trade centers to commit to the security of alien merchants. The merchant guild developed the theoretically required attributes, secured merchants' property rights, and evolved in response to crises to extend the range of its effectiveness, contributing to the expansion of trade during the late medieval period. We elaborate on the relations between our theory and the monopoly theory of merchant guilds and contrast it with repeated-game theories that provide no role for formal organization. One of the central questions about the institutional foundations of markets concerns the power of the state. The simplest economic view of the state as an institution that enforces contracts and property rights and provides public goods poses a dilemma: A state with suffiThis paper was originally prepared for the conference on Economic Policy in Political Equilibrium, June 14-16, 1990. We thank Yoram Barzel, Douglass C. North, JeanLaurent Rosenthal, Nathan Sussman, and an anonymous referee for helpful comments; Esther-Mirjam Sent and Joshua Gans for editorial assistance; and the National Science Foundation for financial support. The participants at the conference on Markets and Organizations organized by the Center for Economic Research at Tilburg and seminar participants at the University of California at Berkeley, Boston University, Indiana University, the University of Illinois at Urbana-Champaign, Harvard University, the Hebrew University, Stanford University, and Tel-Aviv University contributed helpful comments. [Journal of Political Economy, 1994, vol. 102, no. 4] K 1994 by The University of Chicago. All rights reserved. 0022-3808/94/0204-0003$01.50 745
746 JOURNAL OF POLITICAL ECONOMY cient coercive power to do these things also has the power to withhold protection or confiscate private wealth,undermining the foundations of the market economy.In the particular case of medieval cities, these threats were sometimes realized,discouraging trade by foreign merchants to the mutual disadvantage of the ruler and the mer- chants.It is our thesis that merchant guilds emerged with the encour- agement of the rulers of trading centers to be a countervailing power, enhancing the ruler's ability to commit and laying an important insti- tutional foundation for the growing trade of that period. European economic growth between the tenth and the fourteenth centuries was facilitated by the "Commercial Revolution of the Mid- dle Ages"-the reemergence of Mediterranean and European long- distance trade after an extended period of decline(e.g.,Lopez 1976). For this commercial expansion to be possible,institutions had to be created to mitigate the many kinds of contractual problems associated with long-distance trade.Assessing the significance of these institu- tions requires a subtle analysis.Indeed,the effectiveness of institu- tions for punishing contract violations is sometimes best judged like that of peacetime armies:by how little they must be used.Thus,when one reads the historical record to determine whether a major role of merchant institutions was to ensure contract compliance,the number of instances of enforcement is not a useful indicator.Instead,one must ask,What were the things that threatened,and on occasion thwarted,efficient trading?Can the powers and organizational details of merchant institutions be explained as responses to those threats? Did failures of enforcement trigger major changes in these institu- tions? A comprehensive analysis of a contract enforcement institution must consider why the institution was needed,what sanctions were to be used to deter undesirable behavior,who was to apply the sanc- tions,how the sanctioners learned or decided what sanctions to apply, why they did not shirk from their duty,and why the offender did not flee to avoid the sanction.Some analyses meeting these criteria have been developed.One is Greif's (1989,1993a)analysis of the contractual relations between merchants and their overseas agents in eleventh-century Mediterranean trade.To reap the benefit of em- ploying overseas agents,an institution was required to enable the agents to commit to act on behalf of the merchants.One group of merchants known as the "Maghribi traders"managed their agency relations by forming a coalition whose members ostracized and retali- ated against agents who violated their commercial code.Interrelated contractual arrangements motivated merchants to participate in the collective retaliation against agents who had cheated,and close com- munity ties assured that each member had the necessary information
746 JOURNAL OF POLITICAL ECONOMY cient coercive power to do these things also has the power to withhold protection or confiscate private wealth, undermining the foundations of the market economy. In the particular case of medieval cities, these threats were sometimes realized, discouraging trade by foreign merchants to the mutual disadvantage of the ruler and the merchants. It is our thesis that merchant guilds emerged with the encouragement of the rulers of trading centers to be a countervailing power, enhancing the ruler's ability to commit and laying an important institutional foundation for the growing trade of that period. European economic growth between the tenth and the fourteenth centuries was facilitated by the "Commercial Revolution of the Middle Ages"-the reemergence of Mediterranean and European longdistance trade after an extended period of decline (e.g., Lopez 1976). For this commercial expansion to be possible, institutions had to be created to mitigate the many kinds of contractual problems associated with long-distance trade. Assessing the significance of these institutions requires a subtle analysis. Indeed, the effectiveness of institutions for punishing contract violations is sometimes best judged like that of peacetime armies: by how little they must be used. Thus, when one reads the historical record to determine whether a major role of merchant institutions was to ensure contract compliance, the number of instances of enforcement is not a useful indicator. Instead, one must ask, What were the things that threatened, and on occasion thwarted, efficient trading? Can the powers and organizational details of merchant institutions be explained as responses to those threats? Did failures of enforcement trigger major changes in these institutions? A comprehensive analysis of a contract enforcement institution must consider why the institution was needed, what sanctions were to be used to deter undesirable behavior, who was to apply the sanctions, how the sanctioners learned or decided what sanctions to apply, why they did not shirk from their duty, and why the offender did not flee to avoid the sanction. Some analyses meeting these criteria have been developed. One is Greif's (1989, 1993a) analysis of the contractual relations between merchants and their overseas agents in eleventh-century Mediterranean trade. To reap the benefit of employing overseas agents, an institution was required to enable the agents to commit to act on behalf of the merchants. One group of merchants known as the "Maghribi traders" managed their agency relations by forming a coalition whose members ostracized and retaliated against agents who violated their commercial code. Interrelated contractual arrangements motivated merchants to participate in the collective retaliation against agents who had cheated, and close community ties assured that each member had the necessary information
MERCHANT GUILD 747 to participate in sanctions when necessary.Similarly,Milgrom, North,and Weingast(1990)have argued that the use of merchant courts in the Champagne fairs during the twelfth and the thirteenth centuries can be analyzed as an institution that created proper incen- tives for gathering information,honoring agreements,reporting dis- putes,and adhering to the judgments of the merchant courts.More- over,by centralizing certain record-keeping functions and effectively permitting only merchants in good standing to remain at the fairs, this institution also achieved significant economies in transaction costs relative to other feasible enforcement institutions. The cited papers provide consistent analyses of institutions used to overcome contractual problems among individual merchants active in long-distance trade.Individual merchants,however,were not the only important parties:the rulers of the trading centers at which the merchants met and brought their goods were an important indepen- dent force.Trading centers needed to be organized in ways that secured the person and property of the visiting merchants.Before a trading center became established,its ruler might be inclined to pledge that alien traders would be secure and that their rights would be respected.Once trade was established,however,the medieval ruler faced the temptation to renege on that pledge,failing to provide the promised protection or abusing the merchants'property rights by using his coercive power.In the age prior to the emergence of the nation-state,alien merchants could expect little military or political aid from their countrymen.Without something tangible to secure the ruler's pledge,alien merchants were not likely to frequent that trad- ing center-an outcome that could be costly for both the ruler and the merchants.That rulers recognized the importance of this prob- lem is well reflected in the words of the English king,Edward I,who noticed in 1283 that because alien merchants'property rights were not properly protected,"many merchants are put off from coming to this land with their merchandise to the detriment of merchants and of the whole kingdom"(English Historical Documents,3:420).? On the basis of the theory of repeated games,one might conjecture that since trade relationships between a specific merchant and ruler consist of a potentially long sequence of trading visits,the rulers' commitment problem could be overcome by either a bilateral reputa- I For an analysis of the institution that governed agency relations in twelfth-century Genoa,see Greif(1993b).For game-theoretical and comparative historical analysis of the evolution and functioning of various trading institutions among the twelfth-century Genoese and the eleventh-century Maghribi traders from the Muslim world,see Greif (1994). The recognition that unprotected alien merchants would not come to England is also expressed in the Carta Mercatoria of 1303 (English Historical Documents,3:515)
MERCHANT GUILD 747 to participate in sanctions when necessary.' Similarly, Milgrom, North, and Weingast (1990) have argued that the use of merchant courts in the Champagne fairs during the twelfth and the thirteenth centuries can be analyzed as an institution that created proper incentives for gathering information, honoring agreements, reporting disputes, and adhering to the judgments of the merchant courts. Moreover, by centralizing certain record-keeping functions and effectively permitting only merchants in good standing to remain at the fairs, this institution also achieved significant economies in transaction costs relative to other feasible enforcement institutions. The cited papers provide consistent analyses of institutions used to overcome contractual problems among individual merchants active in long-distance trade. Individual merchants, however, were not the only important parties: the rulers of the trading centers at which the merchants met and brought their goods were an important independent force. Trading centers needed to be organized in ways that secured the person and property of the visiting merchants. Before a trading center became established, its ruler might be inclined to pledge that alien traders would be secure and that their rights would be respected. Once trade was established, however, the medieval ruler faced the temptation to renege on that pledge, failing to provide the promised protection or abusing the merchants' property rights by using his coercive power. In the age prior to the emergence of the nation-state, alien merchants could expect little military or political aid from their countrymen. Without something tangible to secure the ruler's pledge, alien merchants were not likely to frequent that trading center-an outcome that could be costly for both the ruler and the merchants. That rulers recognized the importance of this problem is well reflected in the words of the English king, Edward I, who noticed in 1283 that because alien merchants' property rights were not properly protected, "many merchants are put off from coming to this land with their merchandise to the detriment of merchants and of the whole kingdom" (English Historical Documents, 3:420).2 On the basis of the theory of repeated games, one might conjecture that since trade relationships between a specific merchant and ruler consist of a potentially long sequence of trading visits, the rulers' commitment problem could be overcome by either a bilateral reputaI For an analysis of the institution that governed agency relations in twelfth-century Genoa, see Greif (1993b). For game-theoretical and comparative historical analysis of the evolution and functioning of various trading institutions among the twelfth-century Genoese and the eleventh-century Maghribi traders from the Muslim world, see Greif (1994). 2 The recognition that unprotected alien merchants would not come to England is also expressed in the Carta Mercatoria of 1303 (English Historical Documents, 3:515)
748 JOURNAL OF POLITICAL ECONOMY tion mechanism,in which a merchant whose rights were abused ceased trading,or a multilateral reputation mechanism,in which the cheated merchant and his close associates ceased trading.Yet the historical records indicate that,by and large,the ruler-merchant relations were governed by neither bilateral nor informal multilateral arrangements. On the contrary,ruler-merchant relations were governed by adminis- trative bodies rooted outside the territory of the ruler,which held certain regulatory powers over their member merchants in their own territory and supervised the operation of these merchants in foreign lands.What roles could these administrative bodies theoretically play in overcoming the ruler's commitment problem?What roles did they play in fact? To investigate these questions,we utilize historical records to de- velop a series of game-theoretic models corresponding to different institutional arrangements.The theoretical analyses indicate that al- though some trade is possible even without supporting organizations, sustaining the efficient level of trade is more demanding.Without administrative bodies capable of coordinating and sometimes compel- ling merchants'responses to a ruler's transgressions,trade could not expand to its efficient level.The corresponding historical analysis then suggests that during the late medieval commercial revolution, a specific institution-the merchant guild-developed the necessary attributes to enforce agreements with rulers,thus overcoming the commitment problem and enabling trade expansion.Merchant guilds exhibited a range of administrative forms from subdivision of a city administration to an intercity organization.Yet these forms all shared the common function of ensuring the coordination and internal en- forcement required to surmount the commitment problem by permit- ting effective collective action.We emphasize two points at the outset. First,our argument concerns merchant guilds and not craft guilds.3 Second,we define merchant guilds according to their function rather than their "official,"late medieval name.Hence,as we discuss below, our theory applies to a wider range of medieval merchant organiza- tions than those labeled as merchant guilds. The evaluation of merchant guilds as supporting efficient trade is complementary to the view more common among economic histori- ans that merchant guilds emerged to reduce negotiation costs,to administer trade and taxation,to extract privileges from foreign cities,and to shift rent in their own city (see,e.g.,Gross 1890;Thrupp 1965;North and Thomas 1973).While the existence of merchant s Economists have long associated the latter with the monopolization of a given craft within a specific town.For a recent economic analysis of craft guilds,see Hickson and Thompson (1991).See also Gustafsson (1987)
748 JOURNAL OF POLITICAL ECONOMY tion mechanism, in which a merchant whose rights were abused ceased trading, or a multilateral reputation mechanism, in which the cheated merchant and his close associates ceased trading. Yet the historical records indicate that, by and large, the ruler-merchant relations were governed by neither bilateral nor informal multilateral arrangements. On the contrary, ruler-merchant relations were governed by administrative bodies rooted outside the territory of the ruler, which held certain regulatory powers over their member merchants in their own territory and supervised the operation of these merchants in foreign lands. What roles could these administrative bodies theoretically play in overcoming the ruler's commitment problem? What roles did they play in fact? To investigate these questions, we utilize historical records to develop a series of game-theoretic models corresponding to different institutional arrangements. The theoretical analyses indicate that although some trade is possible even without supporting organizations, sustaining the efficient level of trade is more demanding. Without administrative bodies capable of coordinating and sometimes compelling merchants' responses to a ruler's transgressions, trade could not expand to its efficient level. The corresponding historical analysis then suggests that during the late medieval commercial revolution, a specific institution-the merchant guild-developed the necessary attributes to enforce agreements with rulers, thus overcoming the commitment problem and enabling trade expansion. Merchant guilds exhibited a range of administrative forms from subdivision of a city administration to an intercity organization. Yet these forms all shared the common function of ensuring the coordination and internal enforcement required to surmount the commitment problem by permitting effective collective action. We emphasize two points at the outset. First, our argument concerns merchant guilds and not craft guilds.3 Second, we define merchant guilds according to their function rather than their "official," late medieval name. Hence, as we discuss below, our theory applies to a wider range of medieval merchant organizations than those labeled as merchant guilds. The evaluation of merchant guilds as supporting efficient trade is complementary to the view more common among economic historians that merchant guilds emerged to reduce negotiation costs, to administer trade and taxation, to extract privileges from foreign cities, and to shift rent in their own city (see, e.g., Gross 1890; Thrupp 1965; North and Thomas 1973). While the existence of merchant 3 Economists have long associated the latter with the monopolization of a given craft within a specific town. For a recent economic analysis of craft guilds, see Hickson and Thompson (1991). See also Gustafsson (1987)
MERCHANT GUILD 749 guilds could affect the distribution of rents besides enhancing the security of agreements,the unadorned theory of merchant guilds as cartels presents a puzzle:If the purpose of the guilds was to create monopoly power for the merchants and to increase their bargaining power with the rulers,why did powerful rulers during the late medi- eval period cooperate with alien merchants to establish guilds in the first place?What offsetting advantages did the rulers enjoy?The puzzle is resolved if the guild's power enabled trade to expand to the benefit of the merchants and rulers alike.4 While this paper emphasizes the function of the merchant guild in facilitating trade between political units during the late medieval pe- riod,it also sheds light on the changing nature of guilds over time and the complex nature of guilds at any point in time.Although certain features of the merchant guild enabled it to advance trade during the late medieval period,these same features were,in some cases,utilized during the premodern period to restrict trade.Further- more,even during the late medieval period,some merchant guilds had quasi-monopoly rights in their own territories.These rights were part of the relations between rulers and local merchants.Since our paper concentrates on the relations between ruler and alien mer- chants,such rights are not considered here.It is interesting to note, however,that our theory suggests that a merchant guild's monopoly rights in its home locality may have been instrumental in advancing trade between different localities.This type of monopoly rights gen- erated a stream of rents that depended on the support of other mem- bers and so served as a bond,allowing members to commit themselves to collective action in response to a ruler's transgressions.5 The paper proceeds as follows.Section I reports the relevant his- tory.It describes the serious problems trading centers and merchants faced in providing security for merchants and their goods,demon- strates that the guild structure had the features required to resolve the problem,and recounts milestones in the evolution of the guild among German traders and the related expansion of trade.Section II formalizes the analysis.Its game-theoretic model allows us to ex- plore the incentives of traders and cities and explain why a guild organization could sometimes successfully support an efficient level 4 De Roover(1965)asserts that the guild's role "was,of course,to provide collective protection in foreign lands,to secure trade privileges,if possible,and to watch over the strict observance of those already in effect"(p.111).While his intuition carried him a long way,it did not explain how the guilds could provide protection and assure observance of rights by local rulers in foreign lands in which the ruler had a preponder- ance of military force. 5 This is not to argue,however,that this function was necessarily the main reason for these local monopoly rights
MERCHANT GUILD 749 guilds could affect the distribution of rents besides enhancing the security of agreements, the unadorned theory of merchant guilds as cartels presents a puzzle: If the purpose of the guilds was to create monopoly power for the merchants and to increase their bargaining power with the rulers, why did powerful rulers during the late medieval period cooperate with alien merchants to establish guilds in the first place? What offsetting advantages did the rulers enjoy? The puzzle is resolved if the guild's power enabled trade to expand to the benefit of the merchants and rulers alike.4 While this paper emphasizes the function of the merchant guild in facilitating trade between political units during the late medieval period, it also sheds light on the changing nature of guilds over time and the complex nature of guilds at any point in time. Although certain features of the merchant guild enabled it to advance trade during the late medieval period, these same features were, in some cases, utilized during the premodern period to restrict trade. Furthermore, even during the late medieval period, some merchant guilds had quasi-monopoly rights in their own territories. These rights were part of the relations between rulers and local merchants. Since our paper concentrates on the relations between ruler and alien merchants, such rights are not considered here. It is interesting to note, however, that our theory suggests that a merchant guild's monopoly rights in its home locality may have been instrumental in advancing trade between different localities. This type of monopoly rights generated a stream of rents that depended on the support of other members and so served as a bond, allowing members to commit themselves to collective action in response to a ruler's transgressions.5 The paper proceeds as follows. Section I reports the relevant history. It describes the serious problems trading centers and merchants faced in providing security for merchants and their goods, demonstrates that the guild structure had the features required to resolve the problem, and recounts milestones in the evolution of the guild among German traders and the related expansion of trade. Section II formalizes the analysis. Its game-theoretic model allows us to explore the incentives of traders and cities and explain why a guild organization could sometimes successfully support an efficient level 4 De Roover (1965) asserts that the guild's role "was, of course, to provide collective protection in foreign lands, to secure trade privileges, if possible, and to watch over the strict observance of those already in effect" (p. 111). While his intuition carried him a long way, it did not explain how the guilds could provide protection and assure observance of rights by local rulers in foreign lands in which the ruler had a preponderance of military force. 5 This is not to argue, however, that this function was necessarily the main reason for these local monopoly rights
750 JOURNAL OF POLITICAL ECONOMY of trading activity when a simple reputation mechanism could not. Section III concludes the paper by considering the subsequent his- tory-the transformation and decline of the merchant guild associ- ated with the rise of the state-and suggests other applications of the theoretical framework. I.The Commitment Problem and the Role of Merchant Guilds Institutions and Commitment Long-distance trade in late medieval Europe was based on the ex- change of goods brought from different parts of the world to central cities or fairs located in geographically or politically favorable places. Yet the presence of gains from trade and locations suitable to conduct exchange does not imply that exchange could occur without an insti- tutional environment in which the merchants and their property were secure.The concern that rulers felt to provide security,reflected in the words of Edward I quoted above,should be understood against the background of events such as the following one that occurred in Boston,England,in,or shortly before,1241.A Flemish merchant accused an English trader of not repaying a commercial loan.This resulted in an uproar on all sides and the English merchants assembled to attack the Flemings,who retired to their lodging in the churchyard....The English threw down the pailings,broke the doors and windows and dragged out Peter Balg [the lender]and five others,whom they foully beat and wounded and then set in the stocks.All the other Flemings they beat, ill-treated and robbed,and pierced their cloths with swords and knives....Their silver cups were carried off as they sat at table,their purses cut and the money in them stolen,[and] their chests broken open and money and goods,to an un- known extent,taken away.[Curia Regis,121,m.6;pub- lished by Salzman (1928)] Such disorders were not peculiar to England but mark the history of long-distance medieval trade.For example,the commercial relations between Byzantine and Italian city-states were often hindered by inse- curity during the twelfth century.The Genoese quarter in Constanti- nople was attacked by the Pisans in 1162.At least one merchant was killed,and the other Genoese merchants had to escape to their ship leaving all their valuables behind them.In 1171 the Venetians at- tacked and destroyed the same Genoese quarter.About 10 years later
750 JOURNAL OF POLITICAL ECONOMY of trading activity when a simple reputation mechanism could not. Section III concludes the paper by considering the subsequent history-the transformation and decline of the merchant guild associated with the rise of the state-and suggests other applications of the theoretical framework. I. The Commitment Problem and the Role of Merchant Guilds Institutions and Commitment Long-distance trade in late medieval Europe was based on the exchange of goods brought from different parts of the world to central cities or fairs located in geographically or politically favorable places. Yet the presence of gains from trade and locations suitable to conduct exchange does not imply that exchange could occur without an institutional environment in which the merchants and their property were secure. The concern that rulers felt to provide security, reflected in the words of Edward I quoted above, should be understood against the background of events such as the following one that occurred in Boston, England, in, or shortly before, 1241. A Flemish merchant accused an English trader of not repaying a commercial loan. This resulted in an uproar on all sides and the English merchants assembled to attack the Flemings, who retired to their lodging in the churchyard.... The English threw down the pailings, broke the doors and windows and dragged out Peter Balg [the lender] and five others, whom they foully beat and wounded and then set in the stocks. All the other Flemings they beat, ill-treated and robbed, and pierced their cloths with swords and knives.... Their silver cups were carried off as they sat at table, their purses cut and the money in them stolen, [and] their chests broken open and money and goods, to an unknown extent, taken away. [Curia Regis, 121, m. 6; published by Salzman (1928)] Such disorders were not peculiar to England but mark the history of long-distance medieval trade. For example, the commercial relations between Byzantine and Italian city-states were often hindered by insecurity during the twelfth century. The Genoese quarter in Constantinople was attacked by the Pisans in 1162. At least one merchant was killed, and the other Genoese merchants had to escape to their ship leaving all their valuables behind them. In 1171 the Venetians attacked and destroyed the same Genoese quarter. About 10 years later
MERCHANT GUILD 751 a mob destroyed all the Italian quarters in Constantinople during the "Latin massacre"of 1182(Day [1988];for additional examples, see also De Roover [1965,p.61];Lane [1973,p.34];Kedar [1976, p.26ff.]. In light of the theory of repeated games,one might conjecture that a ruler's commitment problem could be solved by a bilateral reputation mechanism in which individual merchants whose person and property were not protected by a local ruler would refuse to return with their goods in the future.The ruler,while perhaps reaping short-run gains from ignoring a merchant's rights,stood to lose the future stream of rents from the cheated merchant's trade.5 As we demonstrate for- mally in Section II,this intuition is misleading.At the level of trade that maximizes the total net value of trade-that is,at the efficient volume of trade-a bilateral reputation mechanism cannot resolve the commitment problem.In our formal theory,the reason is that,at the efficient volume of trade,the value of the stream of future rents collected by the ruler from an individual marginal merchant is almost zero and is therefore smaller than the value of the goods that can be seized or the cost of the services that can be withheld.The same conclusion would hold even at lesser volumes of trade if the fre- quency of visits by an individual trader were low.As long as ruler- merchant relations are governed only by a bilateral reputation mecha- nism,our theory holds that trading volume cannot expand to its efficient level. The preceding discussion and the formal model below allow only one kind of sanction for cheated merchants:the withdrawal of trade. Military action might seem another important alternative.In the late medieval period,however,defensive technology was superior to of- fensive technology,and the costs and risks of offensive military action at distant ports limit its credibility as a sanction for trade violations.? A possible means to increase the punishment is a multilateral re- sponse by all the merchants to transgressions against any subgroup of merchants.Indeed,the history of the relations between trade cen- ters and alien merchants presents several examples of multilateral retaliations against rulers who had reneged on their contractual obli- 6 Clearly,there was a limit to the security a ruler could provide the merchants. Accordingly,we have detailed above instances in which rights were abused in major cities or trade centers in which the relevant ruler had a relatively high level of ability to secure rights. 7 Parker(1988,p.7)comments that "After the proliferation of stone-built castles in western Europe,which began in the eleventh century ..in the military balance between defence and offense,the former had clearly become predominant."This situation changed only during the so-called Military Revolution of the fifteenth century
MERCHANT GUILD 751 a mob destroyed all the Italian quarters in Constantinople during the "Latin massacre" of 1182 (Day [1988]; for additional examples, see also De Roover [1965, p. 61]; Lane [1973, p. 34]; Kedar [1976, p. 26 ff.]). In light of the theory of repeated games, one might conjecture that a ruler's commitment problem could be solved by a bilateral reputation mechanism in which individual merchants whose person and property were not protected by a local ruler would refuse to return with their goods in the future. The ruler, while perhaps reaping short-run gains from ignoring a merchant's rights, stood to lose the future stream of rents from the cheated merchant's trade.6 As we demonstrate formally in Section II, this intuition is misleading. At the level of trade that maximizes the total net value of trade-that is, at the efficient volume of trade-a bilateral reputation mechanism cannot resolve the commitment problem. In our formal theory, the reason is that, at the efficient volume of trade, the value of the stream of future rents collected by the ruler from an individual marginal merchant is almost zero and is therefore smaller than the value of the goods that can be seized or the cost of the services that can be withheld. The same conclusion would hold even at lesser volumes of trade if the frequency of visits by an individual trader were low. As long as rulermerchant relations are governed only by a bilateral reputation mechanism, our theory holds that trading volume cannot expand to its efficient level. The preceding discussion and the formal model below allow only one kind of sanction for cheated merchants: the withdrawal of trade. Military action might seem another important alternative. In the late medieval period, however, defensive technology was superior to offensive technology, and the costs and risks of offensive military action at distant ports limit its credibility as a sanction for trade violations.7 A possible means to increase the punishment is a multilateral response by all the merchants to transgressions against any subgroup of merchants. Indeed, the history of the relations between trade centers and alien merchants presents several examples of multilateral retaliations against rulers who had reneged on their contractual obli- 6 Clearly, there was a limit to the security a ruler could provide the merchants. Accordingly, we have detailed above instances in which rights were abused in major cities or trade centers in which the relevant ruler had a relatively high level of ability to secure rights. 7Parker (1988, p. 7) comments that "After the proliferation of stone-built castles in western Europe, which began in the eleventh century . . . in the military balance between defence and offense, the former had clearly become predominant." This situation changed only during the so-called Military Revolution of the fifteenth century
752 JOURNAL OF POLITICAL ECONOMY gations.For example,circa 1050 the Muslim ruler of Sicily imposed a 10 percent tariff (instead of the 5 percent tariff specified in the Islamic law)on goods imported to Sicily by Jewish traders.The trad- ers responded by imposing an embargo and sending their goods to the rival trade center,Tunisia.The embargo was effective,and after a year the Sicilian ruler relented and removed the tariff(David Kauf- mann Collection,Hungarian Academy of Science,Budapest,docu- ment no.22,pt.a,lines 29-31;pt.b,lines 3-5;Gil [1983,pp.97- 106];Taylor-Schechter Collection,University Library,Cambridge, document no.10 J 12,folio 26,p.a,lines 18-20;Michael [1965, 2:85]) The examples above suggest that a multilateral reputation mechanism might be able to surmount the commitment problem without the aid of any formal organization.In each case,merchants imposed a collective punishment on the city that included participation by merchants who had not been directly injured.Several of the cited offenses were offenses against an entire group of merchants.In medieval trade,however,a city could also discriminate among merchants,abus- ing or not protecting them selectively.For example,a city could con- fiscate the belongings of some traders or withhold legal protection from them without directly harming other alien merchants.Indeed, the Sicilian rulers increased the tariff only to Jewish traders;and during two attacks on the Genoese quarter in Constantinople,other Italian merchants were not harmed.This suggests two interconnected reasons why,without a supporting organization,a multilateral repu- tation mechanism may be insufficient to surmount the commitment problem at the efficient level of trade.The first involves contract ambiguities and asymmetric information,whereas the second reflects the distinct incentives among different traders generated by a multi- lateral response. Long-distance premodern trade took place in a highly complex and uncertain environment.Unanticipated events and multiple interpre- tations of existing agreements were always possible under these cir- cumstances,implying that the definition of a"contract violation"was often ambiguous.Information asymmetry,slow communication,and different interpretations of facts among merchants imply that without an organization that coordinates responses,it was not likely that all the merchants would respond to the abuse of any group of mer- chants.As demonstrated formally in Section II,if the fraction of merchants who detect and react to an abuse against any group of merchants is only proportionate to the number abused,then a multi- lateral reputation mechanism is ineffective at the efficient volume of trade.It is ineffective for the same reason that a bilateral reputation mechanism is ineffective:a threat by a group of marginal traders to
752 JOURNAL OF POLITICAL ECONOMY gations. For example, circa 1050 the Muslim ruler of Sicily imposed a 10 percent tariff (instead of the 5 percent tariff specified in the Islamic law) on goods imported to Sicily by Jewish traders. The traders responded by imposing an embargo and sending their goods to the rival trade center, Tunisia. The embargo was effective, and after a year the Sicilian ruler relented and removed the tariff (David Kaufmann Collection, Hungarian Academy of Science, Budapest, document no. 22, pt. a, lines 29-31; pt. b, lines 3-5; Gil [1983, pp. 97- 106]; Taylor-Schechter Collection, University Library, Cambridge, document no. 10 J 12, folio 26, p. a, lines 18-20; Michael [1965, 2:85]). The examples above suggest that a multilateral reputation mechanism might be able to surmount the commitment problem without the aid of any formal organization. In each case, merchants imposed a collective punishment on the city that included participation by merchants who had not been directly injured. Several of the cited offenses were offenses against an entire group of merchants. In medieval trade, however, a city could also discriminate among merchants, abusing or not protecting them selectively. For example, a city could confiscate the belongings of some traders or withhold legal protection from them without directly harming other alien merchants. Indeed, the Sicilian rulers increased the tariff only to Jewish traders; and during two attacks on the Genoese quarter in Constantinople, other Italian merchants were not harmed. This suggests two interconnected reasons why, without a supporting organization, a multilateral reputation mechanism may be insufficient to surmount the commitment problem at the efficient level of trade. The first involves contract ambiguities and asymmetric information, whereas the second reflects the distinct incentives among different traders generated by a multilateral response. Long-distance premodern trade took place in a highly complex and uncertain environment. Unanticipated events and multiple interpretations of existing agreements were always possible under these circumstances, implying that the definition of a "contract violation" was often ambiguous. Information asymmetry, slow communication, and different interpretations of facts among merchants imply that without an organization that coordinates responses, it was not likely that all the merchants would respond to the abuse of any group of merchants. As demonstrated formally in Section II, if the fraction of merchants who detect and react to an abuse against any group of merchants is only proportionate to the number abused, then a multilateral reputation mechanism is ineffective at the efficient volume of trade. It is ineffective for the same reason that a bilateral reputation mechanism is ineffective: a threat by a group of marginal traders to
MERCHANT GUILD 753 withdraw their trade is barely significant once trade has expanded to its efficient level. To permit an efficient expansion of trade in the medieval environ- ment,there was a need for an organization that would supplement the operation of a multilateral reputation mechanism by coordinating the responses of a large fraction of the merchants.Only when a coor- dinating organization exists can the multilateral reputation mecha- nism potentially overcome the commitment problem.In our formal model,when a coordinating organization exists there is a Markov perfect equilibrium at which traders come to the city(at the efficient level of trade)as long as a boycott has never been announced;none of them comes to trade if a boycott has been announced.The ruler respects merchants'rights as long as a boycott has never been an- nounced but abuses their rights otherwise.Thus,when a coordinating institution exists,trade may plausibly expand to its efficient level. Although the behavior described forms a perfect equilibrium,the theory in this form remains unconvincing.According to the equilib- rium strategies,when a coordinating institution organizes an em- bargo,merchants are deterred from disregarding it because they ex- pect the ruler to abuse violators'trading rights.But are these expectations reasonable?Why would a city not encourage embargo breakers rather than punish them?As verified in Section II,this encouragement is potentially credible.During an effective embargo, the volume of trade shrinks and the value of the marginal trader increases;it is then possible for bilateral reputation mechanisms to become effective.That is,there may exist mutually profitable terms between the city and the traders that the city will credibly respect. This possibility limits the potential severity of an embargo and,corre- spondingly,potentially hinders the ability of any coordinating organi- zation to support efficient trade.To support the efficient level of trade,a multilateral reputation mechanism may need to be supple- mented by an organization with the ability both to coordinate embargo decisions and to enforce them by applying sanctions on its own mem- bers. Evidence of the Role of Formal Organizations The discussion so far has focused on two issues:a demonstration that guaranteeing the security of alien merchants and their goods was problematic in medieval Europe and that both historical evidence and theoretical reasoning suggest that a simple reputation mechanism could not completely resolve the problem.In this subsection,we iden- tify more direct evidence that merchants and rulers recognized the need to provide believable assurances of security for traders and their
MERCHANT GUILD 753 withdraw their trade is barely significant once trade has expanded to its efficient level. To permit an efficient expansion of trade in the medieval environment, there was a need for an organization that would supplement the operation of a multilateral reputation mechanism by coordinating the responses of a large fraction of the merchants. Only when a coordinating organization exists can the multilateral reputation mechanism potentially overcome the commitment problem. In our formal model, when a coordinating organization exists there is a Markov perfect equilibrium at which traders come to the city (at the efficient level of trade) as long as a boycott has never been announced; none of them comes to trade if a boycott has been announced. The ruler respects merchants' rights as long as a boycott has never been announced but abuses their rights otherwise. Thus, when a coordinating institution exists, trade may plausibly expand to its efficient level. Although the behavior described forms a perfect equilibrium, the theory in this form remains unconvincing. According to the equilibrium strategies, when a coordinating institution organizes an embargo, merchants are deterred from disregarding it because they expect the ruler to abuse violators' trading rights. But are these expectations reasonable? Why would a city not encourage embargo breakers rather than punish them? As verified in Section II, this encouragement is potentially credible. During an effective embargo, the volume of trade shrinks and the value of the marginal trader increases; it is then possible for bilateral reputation mechanisms to become effective. That is, there may exist mutually profitable terms between the city and the traders that the city will credibly respect. This possibility limits the potential severity of an embargo and, correspondingly, potentially hinders the ability of any coordinating organization to support efficient trade. To support the efficient level of trade, a multilateral reputation mechanism may need to be supplemented by an organization with the ability both to coordinate embargo decisions and to enforce them by applying sanctions on its own members. Evidence of the Role of Formal Organizations The discussion so far has focused on two issues: a demonstration that guaranteeing the security of alien merchants and their goods was problematic in medieval Europe and that both historical evidence and theoretical reasoning suggest that a simple reputation mechanism could not completely resolve the problem. In this subsection, we identify more direct evidence that merchants and rulers recognized the need to provide believable assurances of security for traders and their
