Contract enforceability and economic institutions in early trade: The Maghribi Traders' Coalition

Abstract

This paper presents an economic institution which enabled eleventh-century traders to benefit from employing overseas agents despite the commitment problem inherent in these relations. Agency relations were governed by a coalition--an economic institution in which expectations, implicit contractual relations, and a specific information-transmission mechanism supported the operation of a reputation mechanism. Historical records and a simple game-theoretical model are used to examine this institution. The study highlights the interaction between social and economic institutions, the determinants of business practices, the nature of the merchants' law, and the interrelations between market and nonmarket institutions. Copyright 1993 by American Economic Association.