aldermen to make decisions on behalf of the guilds’ members. Determining how the guild organization selects its aldermen, identifying the private interests those merchants may have, and modeling how the guild organization manages the principal-agent problem of controlling the aldermen are complex issues that merit close analysis. Modeling the guild organization in this manner implies explicitly considering it as an institution in addition to an institutional element. Doing so and including these issues in the model here would only obscure the main point, however. For this reason these issues are set aside for future research, and the guild organization is modeled as a mere automaton. By considering different intertransactional linkages and hence assigning information and capabilities to the guild, it is possible to evaluate its contribution to trade expansion.
This subsection examines the role of the guild as an organization for communication and coordination. Assume that if the city cheats a set of traders, T, the guild discovers the event and announces an embargo with probability 4(T) $ X(T). This specification means that the more merchants were cheated, the more likely the guild organization is to realize that cheating had occurred. It does not imply, however, that the guild organization has better information than that which was available to merchants under the uncoordinated reputation mechanism examined in game 2. It implies only that if the guild discovers cheating, it can communicate it to all merchants.
In this game, the guild organization makes an embargo announcements mechanically and without any means of enforcement. Traders learn of the guild's announcement each period, but they are not forced to heed it. The announcement simply becomes part of the information available to them and to the city. In all other respects, the game is the same as game 1. Despite the guild organization's lack of enforcement ability, the mere change in information alters the set of equilibria.
Proposition 4.3: Suppose that t + T # 1 and
c # @(t!c) . (4) Then the following strategies form a Markov perfect equilibrium of game 3: The city does not cheat unless an embargo is announced by the guild organization leader; after an embargo is