purses cut and the money in them stolen, their chests broken open and money and goods, to an unknown extent, taken away.5
Such incidents were not peculiar to England; they mark the history of long-distance medieval trade.6 During the twelfth century, insecurity often hindered commercial relations between the Byzantine Empire and the Italian city-states. Pisans attacked the Genoese quarter in Constantinople in 1162, killing at least one merchant and forcing the others to flee to their ship, leaving all their valuables behind. In 1171 the Venetians attacked and destroyed the same Genoese quarter. About ten years later, a mob destroyed all the Italian quarters in Constantinople during the “Latin massacre” of 1182 (Day 1988).7 Merchants abroad needed protection from coercive power.
In light of the theory of repeated games, one might conjecture that a ruler's commitment problem could be solved by a bilateral reputation mechanism in which individual merchants whose person and property were not protected by a local ruler would refuse to return with their goods in the future. The ruler might reap short-run gains by ignoring a merchant's rights, but he stood to lose the future stream of rents from the cheated merchant's trade. Beliefs linking conduct in the central transaction (protection of rights of a particular merchant’s security) with behavior in an auxiliary one (future tax payments by that merchant) can support the beliefs that rights will be secured.
As section 4.2 demonstrates formally, this intuition omits some important considerations. In particular, at the level of trade that maximizes the total net value of trade—the efficient volume of trade—a bilateral reputation mechanism cannot resolve the commitment problem. At the efficient volume of trade, the value of the stream of future rents collected by the ruler from an individual marginal merchant is almost zero—less than the value of goods that can be seized or
the cost of services that can be withheld. The same conclusion holds even at lower volumes of trade if the frequency of visits by an individual trader is low. As long as ruler-merchant relations are governed only by a bilateral reputation mechanism, theory holds that trading volume cannot expand to its efficient level.
This discussion and the formal model presented in section 4.2 allow only one kind of sanction for cheated merchants: withdrawal of trade and hence tax payment. Military action against a polity or a town in response to abuses, although sometimes used, was not generally a viable option. In the late medieval period defensive technology was superior to offensive technology, and the costs and risks of offensive military action at distant ports limited the credibility of threats of military action in response to trade violations.8
A multilateral response by all merchants to transgressions against any subgroup of merchants is a possible means of increasing the punishment and hence deterring abuses. Conditioning behavior in many ruler-merchant transactions on the ruler’s conduct in any such transaction increases the punishment following an abuse. Beliefs in such a linkage can therefore render self-enforcing the belief that a ruler will not abuse rights in a wider set of circumstances.
Indeed, the history of relations between trade centers and foreign merchants presents several examples of multilateral retaliations against rulers who reneged on their contractual obligations. Around 1050 the Muslim ruler of Sicily imposed a 10 percent tariff (instead of the 5 percent tariff specified by Islamic law) on goods imported to Sicily by the Maghribi traders. The traders responded by imposing an embargo and sending their goods to the rival trade center, Tunisia. The embargo was effective: after a year the Sicilian ruler removed the extra tariff.9
Incidents like this one suggest the relevance of a multilateral reputation mechanism in which the ruler is deterred from abusing the rights of any merchant by the threat that many others