Specialization as a Specific Investment Into the Market: A Transaction Cost Approach to the Rise of Markets and Towns in Medieval Germany

In the period from the 9th to the 12th century, Germany witnessed essential steps from a backward agrarian society towards a considerable degree of specialization and trade. The two main institutional innovations of this development were the rise of market places (until the 11th century) and then the rise of free towns (12th century). This paper revisits the famous 19th century debate on the origin of marketplaces and towns with the tools of transaction cost economics. The evolution of the governance of market places and the founding of the free medieval towns is explained by the growing needs of townsmen to invest specifically into the market place in an environment of growing trade flows and of an increasing relative efficiency of specialized production technologies.