DP7374 | Two is Company, N is a Crowd? Merchant Guilds and Social Capital

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Local merchant guilds were ubiquitous in medieval Europe, and their development was inextricably linked with the development of towns and the rise of the merchant class. We develop a theory of the emergence of local merchant guilds as an efficient mechanism to implement collusion among merchants and rulers, building on the natural complementarity between merchants' market trading and mutual monitoring. Our model explains the main observed features of local merchant guilds' behavior, their rules and internal organization, including membership restrictions and exclusion, and their relationship with rulers. Moreover, it identifies the main channels through which the guilds' social capital influenced their ability to collude with rulers, and hence social welfare. As we show, the available historical evidence supports our theory, shedding new light on the role of the guilds' social capital. We then extend the model to analyze the key trade-offs faced by rulers in choosing whether to grant recognition to one or multiple guilds. This provides an additional rationale for the establishment of the alien merchant guilds first analyzed by Greif, Milgrom and Weingast (1994), helping us to understand the observed distribution of guilds and their characteristics.