Journal File AAS August 2000

How the commitment problem was solved in long distance trade in 12th century Mediterranean and its relevance to contemporary hog trade in Vietnam

Long distance trade in the 12th Century provided many opportunities for cheating by the agents of the principals in Europe. It was impossible to write complete contracts and impossible to enforce in any kind of court. Two groups of traders found different institutions to solve the commitment problem. The Jewish Maghribs depended on familial ties (Greif 1992). A Maghribi would employ only another Maghribi who would be disciplined by other Maghribi if he were opportunistic. AMultilateral punishment enabled the employment of agents even when the relations between a specific merchant and agent were not expected to repeat.@ 130 On the other hand, it was presumed that a Maghribi would cheat a non-Maghribi. So if you offended any member of the tribe you could not get work within the tribe or outside. This limited the extent of the market to members of the tribe who happened to immigrate to various trading centers.

The Genose on the other hand could find trading partners anyplace. The Genose traders paid unrelated agents a premium Aefficiency wage@ to ensure their commitment (higher than the wage in comparable work). The Aefficiency wage@ was made possible by a trading monopoly operating out of Genoa. AThis monopoly was utilized to provide agents with the stream of rents required to keep them honest by conditioning agents= future trade investment on past conduct.@ AThe patron system, based on a bilateral reputation mechanism, evolved to govern agency relations.@ The Italian traders eventually dominated Mediterranean and Far East trade suggesting that their institutions were superior to that of the Maghribis.

What is relation of this history to the Vietnamese hog sector described by Katell Le Goulven (Goulven 1998)? Vietnamese contemporary hog traders. Each collector has a unique set of beaters and informants who he has learned to trust in repeated transactions. The beaters and informants in turn have a unique tie to farmers who they learn to trust. This is not generalizable and can=t easily be extended to new areas if there are economies of scale. AGathering data on a greater scale would imply huge costs in time and personal involvement on the part of the collector in each village he would like to buy hogs from.@ Informants only work in one village and sell information to collectors and are paid a commission. Beaters work for only one collector and are paid according to the number and quality of hogs (it is not clear how the final dressed quality is traced back to an individual beater). The farmer is not paid until the meat is sold at retail. The collector has possession of the hogs who transacts with a slaughterman who is paid 2% of the eventual carcass value when the dressed meat is sold to a retailer. The slaughterman acts as a broker for collectors who only deal with him. Retailers buy on credit in the morning and pay in the afternoon after the meat is sold to consumers. ARetailers must choose the hogs alive and discuss the price of the carcass before slaughter. It appears that the collector may make a mistake and pay more than the hog is worth in the eyes of the retailer. And the retailer may make a mistake and pay more that the hog is worth as determined by the yet to occur dressed carcass.

Is the current Vietnamese system closer to the Maghribis or the Genose?

Contrast to the system once used in the U.S. The farmer hired a trucker to bring the animals to a central market. There was little that the trucker could do to affect the quality of the animals in contrast to the bicycle carrier in Vietnam who may damage the animals (?) The typical farmer always hired the same broker to sell his hogs. Several slaughter house/packers would bid on the live animals with a broker acting as the farmer=s agent. The broker was paid a commission and maintained a continuing relationship with the few large packers whose plants were nearby and thus the broker had a reputation to protect. So had some incentive to reveal what the broker knows although that may be limited. The farmer was paid by the packer who bears the risk of carrying inventory. The retailers buys dressed meat. The packer bore any costs of misjudging the quality of the live animal.

Bibliography

Goulven, K. L. (1998). Performance of Markets in a Context of Liberalization: The Case of Hog Industry in Northern Vietnam. EAAE Seminar, Wageningen, Netherlands.

Greif, A. (1992). AInstitutions and Commitment in International trade: Lessons from the Commercial Revolution.@ American Economic Review 82(May): 128-33.

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