Reputation and Coalitions in Medieval Trade: Evidence on the Maghribi ‘Traders Avner Greif The Journal of Economic History, Vol. 49, No. 4 (Dec., 1989), 857-882 Stable URL hutp://links jstor-org/sicisici= 122-0507% 281989 12% 2949%3A4% 3C857%3ARACIMT%3E2.0,CO%3B2-M The Journal of Economic History is currently published by Beonomie History Association, ‘Your use of the ISTOR archive indicates your acceptance of JSTOR’s Terms and Conditions of Use, available at hup:/www,jstororglabout/terms.hml. ISTOR’s Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at hupulwww.jstor.orgijournals/eha htm]. Each copy of any part of @ JSTOR transmission must contain the same copyright notice that appears on the sereen or printed page of such transmission. STOR is an independent not-for-profit organization dedicated to creating and preserving a digital archive of scholarly journals. For more information regarding JSTOR, please contact jstor-info@umich edu bupulwww jstor.org/ Wed Jan 21 00:35:52 2004Reputation and Coalitions in Medieval Trade: Evidence on the Maghribi Traders AVNER GREIF ‘This article examines the economic institution utilized during the eleventh century to facilitate complex trade characterized by asymmetric information and limited legal contract enforceability. The geniza documents are employed to present the “coalition,”” an economic institution based upon a reputation mechanism utilized bby Mediterranean traders to confront the organizational problem associated with the exchange relations between merchants and their overseas agents. The theoretical framework explains many trade-related phenomena, especially why traders utilized specific forms of business association, and indicates the interre~ lations between social and economic institutions. Miiittersnean trade contributed much tothe economic growth of southern Europe during the Middle Ages.' The spread of this trade depended, to a large extent, upon traders’ ability to employ overseas agents or to let business associates function as overseas agents. The employment of overseas agents was vital during the Middle ‘Ages, since goods were sold abroad only after being shipped to their destination.” Since, absent contractual problems, a merchant can de- crease cost by sending goods to an overseas agent rather than traveling with his goods, a large efficiency gain could potentially be achieved by employing overseas agents.? The Journal of Economic History, Vol. XLIX, No. 4 (Dee. 1989). © The Economie History ‘Associaton. All ight reserved. ISSN 0022-0507 ‘The author is Assistant Professor of Economics at Stanford University, Stanford, CA 94305. ‘The article was written while the author was at Northwestern University. 1am grateful to J Mokyr, J. Panzar, and W. Rogerson for helpful discussions and encouragement. The detailed remarks of an anonymous referee and the editor enriched this work. I received many stimulating ‘comments from participants at seminars held at Northwestern University, the University of Chicago, the University of Texas at Austin, Stanford University, M.LT, Yale, the University of Arizona at Tueson, the University of Michigan at Ann Arbor, and Washington University in St Louis. The research was supported by the Sloan Dissertation Fellowship. The usual caveat applies. 'R.S. Lopez, “The Trade of Medieval Europe inthe South,” in M. M. Postan and E. Miller, eds., The Cambridge Economic History of Europe (New York, 1952), vol. 2; R. S. Lopez, The Commercial Revolution ofthe Middle Ages, 50-1350 (New York, 1976). H. Pirenne, Mohammed and Charlemagne (New York, 1939); H. Pireane, A History of Europe (New York, 1956). 2. de Roover, “The Organization of Trade,” in M. M. Postan, E.E, Rich, and E, Miler, eds, ‘The Cambridge Economic History of Europe (Cambridge, 1963), vol 3, p. 44; 8. B. Gras, Business and Capitalism, An Introduction to Business History (New York, 1939); G. Porter, and H. C. Livesay, Merchants and Manufacturers (Baltimore, 1971). ° The superiority of trading systems that employ agents over those that do nt has been shown, by many scholars. See, for example, de Roover, ‘The Organization of Trade,” pp. 43,45 f., 701; M.M. Postan, Medieval Trade and Finance (Cambridge, 197), pp. 61: R. S. Lopez, and I. W. Raymond, Medieval Trade inthe Mediterranean World (New York, 1953), p. 174 857858 Greif C. M. Cipolla has pointed out that the contractual problems associ- ated with agency relations could be resolved neither by the legal system nor by the anonymous market. These problems arose from the fact that the agent who traded using someone else's capital “could easily have disappeared with the capital or cheated in business conducted in far-off markets where none of his associates had any control."** The traders faced an organizational problem: cooperation leads to efficiency gains that the anonymous market for agents’ services fails to capture. Until recently economic theory provided no framework within which such contractual problems could be investigated. Some scholars, such as R. S. Lopez and R. de Roover, have restricted their investigations of trade organization to forms of business association, implicitly assuming that the legal system was able to supervise and enforce the execution of all contracts. Other scholars have examined the establishment of “trust” relations among traders, focusing in particular on the role of social control systems and ethics. W. Sombart pointed out the impor- tance of relationships within “natural groups,” such as clans and tribes. N. Rosenberg and L. E. Birdzell Jr. emphasize loyalty relationships within a specific natural group—the family—and argue that “‘apart from the family, the Middle Ages offered no satisfactory model for mercantile enterprise.”” Following Max Weber, many scholars have stressed the role of ethics in surmounting contractual problems, emphasizing either implicitly or explicitly altruism (“taking pleasure in others’ pleasure”), impure altruism (internalized norms of behavior), and fear of God.* This article examines the economic institution that enabled eleventh- century Mediterranean merchants to deal with the contractual problems that arose from the fact that neither a merchant nor the judges possessed all the information available to “overseas agents,”” individuals who provided trade-related services to geographically remote merchants. The evidence suggests that the observed “trust” reflects a reputation mechanism among economic self-interested individuals.° By establish- ing ex ante a linkage between past conduct and a future utility stream, an agent could acquire a reputation as honest, that is, he could credibly +. M. Cipolla, Before the Indusirial Revolution 2nd edn. New York, 1980), p. 198 5 Lopez, The Commercial Revolution; de Roover, “The Organization of Trade": W. Sombart, “Medieval and Modern Commercial Enterprise,” in F. C. Lane and J. C. Riemersa, eds.. Enterprise and Secular Change (Homewood, 1953); N. Rosenberg and L. E. Birdzll Jr, How the Wes Grew Rich (New York, 1986): M. Weber, General Economie History. rans. by F. H. Knight (New York, 1927). © By seiinterested individuals I refer to individuals whose utility function is defined over their ‘ffort and money income. On the old debate between sociologists and economists concerning the ‘ational versus the social man, see H. A. Simon, Models of Man, Socal and Rational (New York, 1987) and J. T. Landa, “A Theory ofthe Ethnically Homogeneous Middleman Group: Beyond Markets and Hierarchies,” working paper. The Hoover Institution, Stanford University, 1988, p. 14, For a discussion of cooperation versus free riding, see R. M. Dawes and R. H. Thaler, “Anomalies: Cooperation,” Journal of Economie Perspectives, 2 (Summer 1988), pp. 187-97