English, Article, Journal or magazine article edition: Making Financial Markets: Contract Enforcement and the Emergence of Tradable Assets in Late Medieval Europe Lars Boerner; Albrecht Ritschl

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Bookmark: http://trove.nla.gov.au/version/30360
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Making Financial Markets: Contract Enforcement and the Emergence of Tradable Assets in Late Medieval Europe
Author
  • Lars Boerner
  • Albrecht Ritschl
Physical Description
  • preprint
Notes
  • 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
  • Communal responsibility, matching, money demand, credit
  • RePEc:red:sed006:884
Language
  • English
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