Commercial Revolution- Preindustrial period

Question 1

Pre-industrial societies

Answer 1

1. no technology
2. no national markets
3. scarce and unreliable info
4. high transaction costs
5. no manufacturing at large scale
6. business was COMMERCIAL (trade) with merchants as business leaders

Question 2

Most market activity

Answer 2

transaction of high-valued goods

long distance trade

problems: high uncertainty, high transportation costs, high transaction costs, lack of legal protection, agency problems (so fixed remuneration and incentive payments, systems to monitor behavior)

Question 3

Why was reinforcement of trust an important function of commercial organizations?

Answer 3

merchants rely on others to conduct their business

Question 4

Traveling merchants, traveling agents, resident agents

Answer 4

Traveling agents: diversification, increase scale of operations

Resident agents: better market info, develop contacts with local authorities, expensive (only if volume of business was sufficiently large)

Question 5

Merchant Guilds 1000-1800

Answer 5

Formal association of long-distance traders

• coalition of Jewish and Armenian traders
• protection of property against crime and welfare
• enforcement of contracts
• share high start-up costs of protection and transaction governance and benefit from greater market power
• high monitoring costs

Question 6

Maghribi Traders

Answer 6

• homogeneous group of middle-class traders
• coalition= agency relations only among Maghribi agents and merchants
• prevent opportunism of agents based on a credible threat of losing future profitable relations in the coalition
• mutual trust (many without legal contract: legal framework not great, litigation expensive and time-consuming)
• merchants paid agent a premium
• repeated game
• per trade venture: merchants prefer short-term contracts, allows to calculate gain and loss after each transaction

Question 7

Trade Diasporas

Answer 7

Network of members of the same cultural, religious, or ethnic community, each of them established in a different country

• repeated game :reduced uncertainty and risk
• prevents prisoner’s dilemma
• reduced agency problems
• closed group and reduced cost of litigation

Question 8

Venture

Answer 8

a specific trade
when trade was completed, venture was terminated
mutiple simultaneous ventures: diversification
mitigate risk

Question 9

Joint-stock company (early 17th century in Western Europe)

Ex: English and Dutch East India companies (because long-distance trade was very profitable)

Answer 9

• replaced merchant houses and agents with sales branches abroad
• overseas trading companies
• governments involved: trade monopoly to attract merchants into risky ventures, military protection
• large volume of transaction in many different locations (like modern multinationals)
• established production plants abroad
• emergence: capital needed

Question 10

Organization of Joint-Stock companies

Answer 10

BoD who managed and controlled company
voting power determined by n. of shares held
profits distributed to shareholders
shares were transferable and negotiable

Question 11

Similar to modern business organizations

Answer 11

vertically integrated structure
hierarchy of salaried managers
administrative mechanisms

Question 12

Ways to overcome risk

Answer 12

• trade coalitions
• trade networks
• family entreprises