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 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