The emergence of property rights enforcement in early trade: A behavioral model without reputational effects

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Abstract

The present article focuses on the conditions that allow governments to increase property rights protection because they expect enough income from such action. We develop a behavioral explanation, according to which the answer lies in the growth in the importance, size and wealth of merchant guilds in the medieval era in Western Europe as well as a somewhat surprising effect of volatile price structures. We add to prior research by showing that even uncoordinated embargo pressures among multiple guilds could get medieval rulers to offer high levels of property rights protection.

Section snippets

Background

A central question in economic history concerns the expansion of markets prior to the emergence of a state with sufficient power to ensure that contracts and property rights were enforced (Knight, 1992, Greif, 1993, Greif et al., 1994, Sened, 1995, Sened, 1997).2

Towns, goods and traders

There is a fixed population of fifty traders travelling between five towns. In time-step one, each trader is endowed with an initial stock of wealth and is placed at random in one of the five towns. In each town, five goods are traded.4 After the initial random assignment of location, the traders move, in random order, according to their estimate of optimal trading routes.

Results of simulations with fixed guild membership

The first results come from our baseline model with fixed guild membership. In this model, a proportion of the traders, throughout the simulation, remain members of the guilds they are assigned to in the initial time-step. We estimated models in which the following fixed proportions of traders were members of a guild: 0 of the traders (0 guilds), 1/3 of the traders (5 guilds), 2/3 of the traders (10 guilds), or all traders (15 guilds).

As can be seen from Fig. 2, the short-term variation in

Conclusion

If exchange relationships are conceived as repeated interactions, some limited circumstances favour the existence of self-enforcing contracts, based on reputation effects (Sugden, 1989, Kreps, 1990, Knight, 1992, Greif et al., 1994), yet Cooter and Landa (1984), Sened (1997), and others show that reputation effects are inadequate for the emergence of property rights enforcement when the number of traders is sufficiently large. Further, Greif et al. showed that a simple reputation mechanism in a

Acknowledgements

The authors are grateful to Janet Landa, Joel Mokyr, Itai Sened, Nils Stieglitz and an anonymous reviewer for comments.

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