Complementarities between Long-Term Relationships and Short-Term Contracts: Case of Early Modern Japan

Hideshi Itoh, Takashi Shimizu and Yasuo Takatsuki
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Hideshi Itoh: Waseda Business School, Waseda University, JAPAN
Takashi Shimizu: Graduate School of Economics, Kobe University, JAPAN
Yasuo Takatsuki: Research Institute for Economics and Business Administration, Kobe University, JAPAN

No DP2025-33, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: This paper examines the interaction between formal and relational enforcement in early modern Japan, focusing on financial relationships between Daimyo (regional lords) and merchants. Due to class distinctions, loans from merchants to Daimyo lacked legal enforceability, while contracts among merchants were court-enforceable. Some merchants built long-term self-enforcing relationships with Daimyo (becoming Tachiiri), whereas others provided short-term formal loans to underfunded Tachiiri. We develop a model with two markets—one that matches Daimyo with merchants, and the other that matches underfunded Tachiiri with lending merchants—and identify conditions for their co-existence in equilibrium. The analysis shows that merchants value becoming Tachiiri for long-term gains, and that the opportunities for short-term formal lending enhance the sustainability of relational contracts between Daimyo and Tachiiri.

Keywords: Relational contracts; Formal contracts; Matching markets; Financial relationships; Early modern Japan (search for similar items in EconPapers)
JEL-codes: C73 D53 D83 D86 N25 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2025-12
New Economics Papers: this item is included in nep-fdg, nep-his and nep-sea
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