Contract Governance in Small-World Networks: The Case of the Maghribi Traders

Abstract

This Article employs a social network perspective to revisit the best known example of successful private ordering in the economics literature — the case of the Maghribi Jewish merchants who engaged in both local and long distance trade across the Islamic Mediterranean in the eleventh century. Drawing on a case study of the over 200 Maghribi merchant letters available in English, it reveals the ways that a bridge-and-cluster configuration of ties among traders known as a “small-world network” can be effective in supporting trade over long distances, even in an environment of noisy information. Recognizing the contract governance properties of small-world networks is important for three core reasons. First, because the underlying economic forces that give rise to small-world networks are quite common, and they are often associated with innovation related benefits, exploring their governance properties should make it possible to better understand the ways trade is, and can be, supported in a variety of modern markets. Second, understanding the ways small-world networks function can contribute to the design of formal and informal institutions to support exchange. Finally, understanding the governance power of small-world networks reveals that the small, geographically concentrated, close-knit groups (cliques) that the legal literature has long associated with successful private ordering are not in fact a precondition for well-functioning private order, as small-world networks can effectively support trade among large numbers of traders operating at considerable distances from one another.