Making Financial Markets: Contract Enforcement and the Emergence of Tradable Assets in Late Medieval Europe

No 884, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: The emergence of medieval markets has been seen in the literature as hampered by lack of contract enforcement and institutions like merchantsâ€™ communal responsibil-ity. Merchants traveling to a different marketplace could be held liable for debts in-curred by any merchant from their hometown. We argue that communal responsibility was effective in enforcing credit contracts and enabled merchants to use bills of ex-change in long distance trade even if reputation effects were absent. We implement this in the Lagos and Wright (2005) matching model of money demand, assuming that preference shocks follow a two-state Markov chain. We derive conditions under which cash and credit in the anonymous matching market coexist. For fixed but suffi-ciently low cost of credit, agents will pay with cash in low-quality matches, and use cash and credit in high-quality matches. The use of credit reduces the money holdup in the matching market and thus leads to Pareto improvements

Keywords: Communal responsibility; matching; money demand; credit (search for similar items in EconPapers)
JEL-codes: N2 E41 D51 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-his and nep-mac
Date: 2006-12-03

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