Networks, Institutions, and Encounters: Information Exchange in Early-Modern Markets

Abstract

Emerging economies are characterized by the absence of robust legal infrastructures. In these contexts, social networks in the forms of merchant coalitions, kin-groups, and business groups have been shown to have effectively substituted for stable legal institutions by creating systems of reputation and social sanctioning that reduce contract uncertainty and thereby foster trade and commerce. For this reason, repeated interactions and cohesive groups are understood to play a crucial role in early economic development. One-shot market interactions, in contrast, have been linked to the presence of modern legal institutions. We use archival data from an emerging global trade network that developed over the seventeenth, eighteenth, and nineteenth centuries to evaluate whether a strong institutional context is necessary for transient, one-shot exchange. We consider patterns of information exchange in the network and find that, contrary expectations there is (1) little evidence of reputation mechanisms, coalition formation, or reciprocity, (2) transient exchange is in evidence, (3) transient exchange predates strong formal governance, and (4) the increasing institutional strength of formal governance is associated with a decrease in transient exchange. We argue that transient exchange in this network of trade was encouraged by a pattern of interaction imposed upon traders by the factory system.