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

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  • Lars Boerner
  • Albrecht Ritschl

    ()
    (Economics Humboldt-University of Berlin)

Abstract

The emergence of medieval markets has been seen in the literature as hampered by lack of contract enforcement and institutions like merchants’ 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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File URL: http://repec.org/sed2006/up.31003.1140065682.pdf
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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 884.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:884

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Keywords: Communal responsibility; matching; money demand; credit;

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  1. Belen Jerez & Miquel Faig, 2005. "Inflation, Prices, and Information in Competitive Search," 2005 Meeting Papers 462, Society for Economic Dynamics.
  2. Nobuhiro Kiyotaki & Randall Wright, 1989. "A contribution to the pure theory of money," Staff Report 123, Federal Reserve Bank of Minneapolis.
  3. Ricardo Lagos & Randall Wright, 2004. "A unified framework for monetary theory and policy analysis," Staff Report 346, Federal Reserve Bank of Minneapolis.
  4. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
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