Commitment, Coercion and Markets : The Nature and Dynamics of Institutions Supporting Exchange

This paper examines, theoretically and historically the factors determining market expansion, that is, the extent to which impersonal exchange among more individuals in more transactions over time and space is potentially welfare enhancing. Social and cultural factors determine the exchange possible based on private order institutions that, in particular, do not depend on enforcement provided by the state. Private-order institutions thereby determine the potential gain from impersonal exchange supported by third-party (i.e., enforcement provided by the state, organized crime network, religious authorities, etc.). Economic agents, however, would not submit themselves to a third-party with the ability to punish them unless it can commit to refrain from abusing its power. Coercion constraining institutions based on such factors as reputation, administrative structure, and limited information enables such commitment. In short the effective supply of third-party enforcement depends on the institutions enabling it to commit. Both the demands for and the effective supply of third-party contract enforcement institutions determines the extent of impersonal markets