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The State as an Enforcer in Early Venetian Trade: a Historical Institutional Analysis

The State as an Enforcer in Early Venetian Trade: a Historical Institutional Analysis

González de Lara, Yadira  (Dep. of Economic Analysis. University of Alicante)

Paper given at the Fifth World Congress of Cliometrics - Venice International University • Venice, Italy July 8-11, (2004) latest version: April 13, (2005)

Abstract

Venice commercial rise hinged on her 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 uses game theory and historical records to show 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 required to induce merchants to refrain from acting opportunistically.

Previous historical institutional analyses, most notably the work by Avner Greif, have found that reputation-based institutions that did not rely on the state predominated in pre-modern trade. In contrast, this paper finds that in Late-Medieval Venice the state played an active and salutary role in encouraging commerce and suggests that this distinctiveness might well be among the factors leading Venice to be the most economically successful and lasting among the maritime Italian city-states. Yet, this finding differs from the conventional historical wisdom about the role of the state in medieval commerce.

Click here to read this article from World Congress of Cliometrics

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