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June 12, 1997
Existing works on the economic implications of social structures examined the effect of intra-community information and contract enforcement institutions on personal exchange among that community's members. In contrast, this paper examines the extent to which common knowledge regarding social structure impact the set of feasible institutions and thereby the scope of inter-community, impersonal market exchange. When this extent is large, economic agents can condition their actions on one's social affiliation thereby enabling the operation of an institution taking advantage of intra-community, personal contract enforcement to support inter-community, impersonal exchange. This argument is embedded in a historical study of contract enforcement institution that supported inter-community, impersonal exchange in pre-modern Europe. The paper's game theoretical and historical analysis indicates the importance of a particular institution - the Community Responsibility System - in supporting inter-community, impersonal exchange from as early as the twelfth century despite the lack of appropriate legal contract enforceability provided by the state. Thus, the analysis suggests the deficiency of the common view in economic history that in pre-modern Europe impersonal exchanges were not conducted before the emerging states established the appropriate legal systems. By the thirteenth century, however, various communities attempted to abolish the Community Responsibility System and substitute it with legal contract enforcement provided by the state. Social processes that impact the extent to which social structure is common knowledge, communities' size, intra-community heterogeneity, and inter-community mobility were important contributors to this transition..