Coase-Sandor Working Paper Series in Law and Economics
This Article revisits the best known example of successful private ordering in the economics literature: the Maghribi Jewish merchants who engaged in both local and long-distance trade across the Islamic Mediterranean in the eleventh century. Drawing on a case study of over 200 Maghribi merchant letters, it develops a network governance-based account of the way that private ordering might have supported exchange among the Maghribi traders with little or no reliance on the public legal system. The analysis reveals that a particular type of bridge-and-cluster configuration of ties among traders and trading centers--known as a “small-world network”—can have strong reputation-based contract enforcement properties that make it possible support trade over long distances, even in environments of noisy information. This structure economizes on information costs by aggregating information in local nodes and then connecting these nodes with ties that are robust enough to transmit the relevant information but sparse enough to do so at a cost far below the cost of keeping all transactors in the market aware of all reputation-relevant information all of the time. Identifying the governance power of small-world networks reveals that the small, geographically concentrated, close-knit groups (known as cliques) that the legal literature has long associated with successful private ordering are not in fact a precondition for well-functioning private order—small-world networks can effectively support trade among large numbers of traders operating at considerable distances from one another. In addition, because the small world network form can be found in many industries today, recognizing its potential contract governance properties should make it possible to better understand the ways trade both is and can be supported in a variety of modern markets.
Lisa Bernstein, "Contract Governance in Small World Networks: The Case of the Maghribi Traders", Coase-Sandor Working Paper Series in Law and Economics, No. 880 (2018).