LAW & ECONOMICS WORKSHOP
presents
Professor Veronica Santarosa
University of Michigan Law School
Financing Long-Distance Trade Without Banks:
The Joint Liability Rule and Bills of Exchange in
18th-century France
Tuesday, April 2, 2013
4:10 – 6:00
Solarium (room FA2) – Falconer Hall
84 Queen’s Park
By the close of the seventeenth century international trade had expanded beyond the reach of the personal networks on which it had previously depended. How was long-distance trade among strangers financed without banks or international enforcement? I argue that a particular seventeenth century legal innovation, the joint liability rule, enabled the medieval bill of exchange to become the dominant means of payment and credit in the early modern period, thus supporting an unparalleled expansion of trade. The joint liability rule specified that every party who used a bill of exchange to pay for goods or settle a debt was liable for the face value of the bill if it was not paid at maturity. This paper examines the role that joint liability played in ameliorating three fundamental problems in long-distance trade finance: moral hazard between issuers and payers, adverse selection in the market for bills, and imperfect enforcement of international contracts. To this end, I have compiled a new dataset spanning the period from 1780 to 1790 that includes thousands of original bills of exchange, notices of defaulted bills, court records, and business letters of Maison Roux, a large French merchant house. I show that the joint liability rule put in place a formal mechanism that linked otherwise distinct personal networks so that trade could expand beyond the limits any single network could support. Despite evidence of ongoing problems of adverse selection and moral hazard, my findings demonstrate that bills of exchange worked to broaden trade in the sense that agents used them across business networks.
Veronica Santarosa is an Assistant Professor of Law at the University of Michigan. Prof. Santarosa holds a BA in economics from Ibmec Business School in Brazil, an LLB from the University of Sao Paulo, an EMLE from the University of Hamburg, and an LLM and a PhD in economics, both from Yale University.
For more workshop information, please contact Nadia Gulezko at n.gulezko@utoronto.ca.
