Social Distance and Self-Enforcing Exchange - Working Paper

This working paper models social distance as endogenous to the choices of individuals. Peter Leeson shows that where government is absent, large numbers of socially heterogeneous agents can use social distance-reducing signals to capture the gains from widespread trade. Although traditional reputation mechanisms of multilateral punishment break down where large populations of socially diverse agents are involved, ex ante signaling can make widespread trade self-enforcing. Original documents from the thirteenth through fifteenth centuries left by traders participating in international trade via the lex mercatoria provide evidence for this mechanism. JEL Codes: C72, D81, N73