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