Making Financial Markets: Contract Enforcement and the Emergence of Tradable Assets in Late Medieval Europe
AbstractThe 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
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 884.
Date of creation: 03 Dec 2006
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Communal responsibility; matching; money demand; credit;
Find related papers by JEL classification:
- N2 - Economic History - - Financial Markets and Institutions
- E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-13 (All new papers)
- NEP-HIS-2007-01-13 (Business, Economic & Financial History)
- NEP-MAC-2007-01-13 (Macroeconomics)
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