The economic history of sovereignty: communal responsibility, the extended family, and the firm

Economic institutions encompassing increasingly sophisticated concepts of risk-sharing and liability flourished in Europe beginning in the High Middle Ages. These innovations occurred in an environment of fragmented local jurisdictions, not within the framework of the territorial state. In this short paper we attempt to sketch a unifying approach towards the interpretation of the emergence of these institutions. We argue that communal responsibility in medieval city-states created incentives for excessive risk-taking by individual merchants, and that the emergence of firms mitigated this problem. We also find that entity shielding in the sense of Hansmann, Kraakman, and Squire [2006] arose endogenously and is not primarily the result of regulation by local authorities.