Institutions and Impersonal Exchange: The European Experience

40 Pages Posted: 24 May 2004  

Avner Greif

Stanford University - Department of Economics; Canadian Institute for Advanced Research (CIFAR)

Date Written: May 2004

Abstract

This paper presents an institution - the Community Responsibility System (CRS) - which has been a missing link in our understanding of market development. The CRS fostered market expansion throughout pre-modern Europe by providing the contract enforcement required for impersonal exchange characterized by separation between the quid and the quo over time and space. It fostered market expansion because it did not entail the high marginal cost of establishing new exchange relationships based on a reputation mechanism or the high fixed cost associated with establishing an effective centralized legal system. Merchant communes, motivated by concern over their collective reputations, utilized their local and partial intra-community legal institutions to discipline members who cheated in inter-community exchange and to create the organizational infrastructure required for anonymous merchants to credibly reveal their identities. The CRS endogenously declined as the trade it fostered undermined its self-enforceability. Depending on the prevailing political conditions, it was gradually replaced by a centralized legal system based on personal (rather than collective) legal responsibility and supported by the state. This institutional dynamic supports the view that long-distance trade impacts economic growth through its influence on intra-state institutional development.

JEL Classification: N0, N2, C7, F02, C72, D40, K12

Suggested Citation

Greif, Avner, Institutions and Impersonal Exchange: The European Experience (May 2004). Stanford Law and Economics Olin Working Paper No. 284. Available at SSRN: https://ssrn.com/abstract=548783 or http://dx.doi.org/10.2139/ssrn.548783

Avner Greif (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
650-725-8936 (Phone)

Canadian Institute for Advanced Research (CIFAR) ( email )

180 Dundas Street West, Suite 1400
Toronto, Ontario
Canada

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