The Role of the Merchant Coalition in Pre-modern Japanese Economic Development: An Historical Institutional Analysis

This paper examines the role of the merchant coalition (kabu nakama) in the eighteenth and the first half of the nineteenth century in Japan, from the standpoint of Historical Institutional Analysis (Greif[1997, 1998]). Quantitative economic history literature has made clear that market-based economic growth started around the end of the eighteenth century in Japan. On the other hand, the Bakufu, the central government, repeatedly promulgated Aitai Sumeshi Rei (Mutual Settlement Decree), prescribing that the public authorities would not accept suits on pecuniary affairs. This implies that the public system for third-party enforcement was not working well. Activities of the merchant coalition substituted for the public third-party enforcement. Many of the merchant coalitions' codes wrote that all of each coalition's members should suspend transaction with those who cheated any one of the members of the coalition. This was the multilateral punishment strategy (MPS), formulated by Greif[1993]. It is hypothesized that kabu nakama played the role of contract enforcement using the MPS, which reduced incentives for the transaction counterparts to cheat, and thereby promoted a market economy. Also, this paper empirically examines this hypothesis, using an opportunity of a natural experiment. In 1841, the Bakufu prohibited the coalition, intending to eliminate monopoly. The above hypothesis implies that prohibition of the coalition lowered the performance of the market economy. As predicted, we found that the growth rate of the real money supply contracted, that the efficiency of price arbitrage declined, and that inflation rate went up.