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Private GovernanceCreating Order in Economic and Social Life$
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Edward Peter Stringham

Print publication date: 2015

Print ISBN-13: 9780199365166

Published to Oxford Scholarship Online: August 2015

DOI: 10.1093/acprof:oso/9780199365166.001.0001

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Markets without Enforcement

Markets without Enforcement

Reciprocity and Reputation Mechanisms in the World’s First Stock Market

Chapter:
(p.39) Chapter 4 Markets without Enforcement
Source:
Private Governance
Author(s):

Edward Peter Stringham

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199365166.003.0004

In many areas, relying on government to enforce contracts is not an option, yet trading still takes place. In seventeenth-century Amsterdam, government officials viewed most transactions in the world’s first stock market as a form of gambling and refused to enforce contracts. Nevertheless, traders engaged in sophisticated transactions including forward contracts, short sales, hypothecation, and options. Traders followed through with their contracts not because of the threat of law, but because of reciprocity and reputation mechanisms. Similar mechanisms are at work around the world today and are responsible for the existence of stock markets and all of their associated benefits.

Keywords:   prisoner’s dilemma, self-enforcing contract, financial market, Amsterdam Bourse, Dutch golden age

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