Two is Company, N is a Crowd? Merchant Guilds and Social Capital

We develop a theory of the emergence of merchant guilds as an efficient mechanism to foster cooperation between merchants and rulers, building on the natural complementarity between merchants’ market trading and mutual monitoring. Unlike existing models, we focus on local merchant guilds, rather than alien guilds, accounting for the main observed features of their behavior, internal organization and relationship with rulers. Our model delivers novel predictions about guilds’ size, membership restrictions, and their welfare implications. Moreover, it identifies the main channels through which the guilds’ social capital influenced their ability to cooperate effectively with rulers. As we argue, the available historical evidence offers support for our theory. We also extend the model to analyze the key trade-offs faced by rulers in choosing whether to grant recognition to one or multiple guilds. This provides a rationale for the establishment of both local and alien merchant guilds, helping us to understand the observed distribution of guilds and their characteristics.