The Economics of Adaptation and Long-term Relationships
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The Economics of Adaptation and Long-term Relationships

Dean V. Williamson

Do institutions matter in economic theory? Or is the economic analysis of institutions a distraction from the most important action? Indeed, does Vernon Smith’s notion of the “institution-free core” of formal economic theory encompass that most important action? To explore this question, this book opens with an informal tour of the economics of system design out of which an economics of adaptation ultimately emerged. The book then offers explorations, via the application of the economics of adaptation in both law and economics relating to how parties manage relationships within the firm, within the context of long-term contracts, and, most vividly, within the context of antitrust conspiracy.
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Chapter 5: The financial structure of Commercial Revolution: financing long-distance trade in Venice 1190–1220 and Venetian Crete 1278–1400

Dean V. Williamson


How did European merchants finance the commercial revolution? Established narratives highlight roles for reputation effects or the risk-sharing afforded by commenda contracts in enabling merchants to mobilize investment for long-distance trade. In contrast, this study illuminates tradeoffs merchants and their agents encountered in choosing between equity-like schemes (commenda) and debt financing. The study works out of a dataset of 1823 maritime contracts and 291 non-maritime contracts that span 3099 unique contracting dyads (principal–agent pairs). The study demonstrates that it was debt, not commenda, that financed trade on the informational frontiers of the trade economy. It further demonstrates that most trade was conducted through one-shot relationships, not relationships that unfolded over the course of repeated interactions. The results delimit the roles of both formal and relational enforcement mechanisms in enabling long-distance trade in environments that would seem hostile to exchange.

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