THE ROLE OF INSTITUTIONS IN THE REVIVAL OF TRADE: THE LAW MERCHANT, PRIVATE JUDGES, AND THE CHAMPAGNE FAIRS

Authors

  • Paul R. Milgrom,

    1. Department of Economics, Stanford University, Stanford, CA 94305
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  • Douglass C. North,

    1. Department of Economics, Washington University, St. Louis, MO 63130
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  • Barry R. Weingast*

    1. Hoover Institution on War, Revolution and Peace, Stanford University, Stanford, CA 94305
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    • *

      Department of Economics, Stanford University; Department of Economics, Washington University; Hoover Institution, Stanford University. The authors thank Robert Aumann, Gary Becker, Peter DeMarzo, Avner Greif, Michihiro Kandori, Bart Lipson, Uwe Schimack and the participants at numerous workshops for helpful conversations. Mr Milgrom and Mr Weingast thank the National Science Foundation for partial support.


Abstract

A good reputation can be an effective bond for honest behavior in a community of traders if members of the community know how others have behaved in the past – even if any particular pair of traders meets only infrequently. In a large community, it would be impossibly costly for traders to be perfectly informed about each other's behavior, but there exist institutions that can restore the effectiveness of a reputation system using much less extensive information. The system of judges used to enforce commercial law before the rise of the state was such an institution, and it successfully encouraged merchants (1) to behave honestly, (2) to impose sanctions on violators, (3) to become adequately informed about how others had behaved, (4) to provide evidence against violators of the code, and (5) to pay any judgments assessed against them, even though each of these behaviors might be personally costly.

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