Working Paper: CEPR ID: DP8184
Authors: Lars Boerner; Albrecht Ritschl
Abstract: Communal responsibility, a medieval institution studied by Greif (2006), supported the use of credit among European merchants in the absence of modern enforcement technologies. This paper shows how this mechanism helps to overcome enforcement problems in anonymous buyer/seller transactions. In a village economy version of the Lagos and Wright (2005) model, agents trading anonymously in decentralized markets can be identified by their citizenship and thus be held liable for each other. Enforceability within each village's centralized afternoon market ensures collateralization of credit in decentralized markets. In the resulting equilibrium, money and credit coexist in decentralized markets if the use of credit is costly. Our analysis easily extends itself to other payment systems like credit cards that provide a group identity to otherwise anonymous agents.
Keywords: anonymous matching; bills of exchange; communal responsibility; money; credit; demand
JEL Codes: D51; E41; N2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| communal responsibility (P32) | credit in anonymous transactions (E42) |
| communal responsibility (P32) | enforcement problems in decentralized markets (D47) |
| communal responsibility (P32) | coexistence of money and credit (E51) |
| communal responsibility (P32) | collateralization that incentivizes agents to honor debts (G21) |
| low cost of using credit (G21) | equilibrium involving money and credit (E51) |