The Secret Of Venetian Success: The Role Of The State In Financial Markets
González de Lara, Yadira (Universidad de Alicante, Departamento de Fundamentos del Análisis Económic)
Editor: Instituto Valenciano de Investigaciones Económicas, S.A., Universidad de Alicante, September (2005)
The commercial success of Venice hinged on her merchants’ ability to do business with borrowed money. However, to raise other people’s capital, merchants needed to commit not to embezzle the capital received. Despite this commitment problem, the evidence indicates an active financial market through which the Venetians, by and large, mobilized their savings to investments. What were the institutional foundations of this market? This paper claims that neither reputation-based institutions that did not rely on the state nor a coercive legal system provided such foundations. Instead, the state generated the rents and information required to induce merchants to refrain from acting opportunistically.