Institutions and the Path to the Modern Economy: Lessons from Medieval Trade (Political Economy of Institutions and Decisions)

It is widely believed that current disparities in economic, political, and social outcomes reflect distinct institutions. Institutions are invoked to explain why some countries are rich and others poor, some democratic and others dictatorial. But arguments of this sort gloss over the question of what institutions are, how they come about, and why they persist. They also fail to explain why institutions are influenced by the past, why it is that they can sometimes change, why they differ so much from society to society, and why it is hard to study them empirically and devise a policy aimed at altering them. This 2006 book seeks to overcome these problems, which have exercised economists, sociologists, political scientists, and a host of other researchers who use the social sciences to study history, law, and business administration. It presents a multi-disciplinary perspective to study endogenous institutions and their dynamics. Cover Half-title Title Copyright Contents Abbreviations Preface Part I Preliminaries 1 Introduction 1.1 The challenges of studying institutions 1.2 Comparative and historical institutional analysis 1.3 Institutions and commercial expansion during the late medieval period 1.4 The structure of the book 2 Institutions and Transactions 2.1 What is an institution? 2.1.1 Regularity of Behavior 2.1.2 Man-Made Nonphysical Factors That Influence Behavior 2.1.3 Factors Exogenous to Each Individual Whose Behavior They Influence 2.2 Institutions as systems of rules, beliefs, norms, and organizations 2.3 An integrative approach to institutions 2.4 External effects and transactions 2.5 Intertransactional linkages, institutions, and organizations 2.6 Concluding comments: self-enforcing institutions Part II Institutions as Systems in Equilibria 3 Private-Order Contract Enforcement Institutions: The Maghribi Traders’ Coalition 3.1 Commerce, overseas agents, and efficiency 3.2 The commitment problem and the reputation-based community enforcement mechanism 3.3 The model: the agent commitment problem and the multilateral punishment strategy 3.4 The maghribi traders’ coalition: theory and indirect evidence 3.5 Concluding comments Annex 3.1 Proof of Proposition 3.1 Proof of Proposition 3.2 Proof of Proposition 3.3 4 Securing Property Rights from the Grabbing Hand of the State: The Merchant Guild 4.1 The commitment problem and the role of merchant guilds 4.1.1 Institutions and Commitment 4.1.2 Evidence of the Role of Formal Organizations 4.1.3 The Evolution of Guild Organizations 4.2 The formal model 4.3 Concluding comments 5 Endogenous Institutions and Game-Theoretic Analysis 5.1 Institutionalized rules, institutions, and equilibria 5.2 Game theory and modeling endogenous institutions 5.3 Institutional ramifications of social and normative behavior 5.4 Legitimacy and the origin of institutions 5.5 Concluding comments Part III Institutional Dynamics as a Historical Process 6 A Theory of Endogenous Institutional Change 6.1 Persistence 6.2 Stability in the face of an endogenous parametric shift 6.2.1 Knowledge and Playing against the Rules 6.2.2 Coordination 6.2.3 Attention 6.2.4 Habit and Scarce Cognitive Resources 6.3 Quasi-parameters and reinforcement 6.4 Self-reinforcement: a tale of two cities 6.4.1 Genoa 6.4.2 Venice 6.5 Formal representation of institutional reinforcement 6.6 The institutional life cycle 6.7 Concluding comments Annex 6.1: a model of institutional reinforcement Case 1: Knowledge about Reinforcement Case 2: Ignorance about Reinforcement 7 Institutional Trajectories: How Past Institutions Affect Current Ones 7.1 The fundamental asymmetry between institutional elements inherited from the past and technologically feasible alternatives 7.2 The implications of the fundamental asymmetry 7.3 Agency and history 7.4 Knowledge, institutional innovations, and the direction of institutional change 7.5 Institutional complexes: the contemporaneous implications of institutional dynamics 7.6 Concluding comments 7.6.1 Institutional Trajectories and the Influence of the Past 7.6.2 Endogenous Restrictions on the Direction of Change: Contextual Refinement 7.6.3 Taking Stock and Looking Ahead Annex 7.1: intentional use of past institutional elements in the development of uncoordinated institutions: the case of u.s. merchants in mexican california 8 Building a State: Genoa’s Rise and Fall 8.1 Contracting for a state 8.2 A model of mutual deterrence 8.3 The consular system, 1099–1154 8.4 Exogenous changes, undermining, and institutional failure, 1154–94 8.5 Self-enforcing limited state: the genoese podesteria, 1194–1339 8.5.1 Creating a Balance of Power 8.5.2 The Podesteria System in Action 8.6 The podesteria as a self-undermining institution 8.7 Concluding comments 8.7.1 The Genoese Experience: Institutions and Building Effective States 8.7.2 Violence, Institutions, and Prosperity 8.7.3 Social Structures and States in Europe and the Muslim World Annex 8.1: a formal model of genoa’s political institution Mutual-Deterrence Equilibrium with a Fixed Number of Privileges Efficiency Attributes of Mutual-Deterrence Equilibrium When the Number of Privileges Is Endogenous Annex 8.2: existence of a mutual-deterrence equilibrium Annex 8.3: the collusion and podesteria games The Collusion Game The Podesteria Game 9 On the Origin of Distinct Institutional Trajectories: Cultural Beliefs and the Organization of Society 9.1 Agency relations and cultural beliefs 9.2 The origin and manifestations of diverse cultural beliefs among the maghribis and the genoese 9.3 Cultural beliefs, social patterns of agency relations, and the distribution of wealth 9.4 Transcending the boundaries of the game: segregated and integrated societies 9.5 Transcending the boundaries of the game: organizational evolution 9.6 Concluding comments Annex 9.1 Proof of Proposition 9.1 Proof of Proposition 9.2 Proof of Proposition 9.4 Proof of Proposition 9.5 Part IV The Empirical Method of Comparative and Historical Institutional Analysis 10 The Institutional Foundations of Impersonal Exchange 10.1 Exchange in which the quid is separated from the quo 10.2 The inadequacy of deduction alone to identify institutions 10.3 The inadequacy of theory enriched with a microanalytic model 10.4 The community responsibility system 10.4.1 A Theory of the Community Responsibility System 10.4.2 The Historical Evidence on the Community Responsibility System 10.5 Institutional decline and transition: toward individual legal responsibility 10.6 Concluding comments 11 Interactive, Context-Specific Analysis 11.1 Insufficiency of deduction 11.2 The insufficiency of induction 11.3 Initiating institutional analysis 11.4 Toward a conjecture: assembling the pieces 11.5 Conjecture and context-specific models 11.6 Evaluating a conjecture through interactive, context-specific analysis 11.7 Concluding comments Part V Concluding Comments 12 Institutions, History, and Development 12.1 Institutions and black boxes: the good, the bad, and the messy 12.2 Comparative and historical institutional analysis 12.3 The late medieval commercial expansion and the rise of the west: the origin of the modern economy 12.4 The challenge ahead: constructing well-functioning markets and polities A A Primer in Game Theory a.1 Self-enforcing behavior in static games: the nash equilibrium a.2 Self-enforcing behavior in dynamic games: backward induction and subgame perfect equilibria a.3 Self-enforcing behavior in repeated games: subgame perfect equilibria, the folk theorem, and imperfect monitoring B Is Homo Sociologicus Strategic? C The Role of Theory: Reputation-Based Private-Order Institutions C.1 Adverse selection: incomplete information C.2 Moral hazard: complete information C.2.1 The End-Game Problem C.2.2 Endogenous Payoffs C.2.3 Credibility C.2.4 Credibility and Multilateral (Third-Party) Punishment C.2.5 Renegotiation C.2.6 Endogenous Information C.2.7 Imperfect Monitoring C.2.8 Endogenous Intertransactional Linkages and Organizations C.2.9 The Costs of Reputation-Based Institutions C.3 Concluding comments References Index It Is Widely Believed That Current Disparities In Economic, Political And Social Outcomes Reflect Distinct Institutions. Avner Greif Presents A Multi-disciplinary Perspective To Study Endogenous Institutions And Their Dynamics And To Understand Why They Are Influenced By The Past. Preliminaries -- Institutions As Systems In Equilibria -- Institutional Dynamics As A Historical Process -- The Empirical Method Of Comparative And Historical Institutional Analysis -- Concluding Comments. Avner Greif. Includes Bibliographical References (p. 453-488) And Index. On March 28, 1210, Rubeus de Campo of Genoa agreed to pay a debt of 100 marks sterling in London on behalf of Vivianus Jordanus from Lucca.1