In premodern trade, merchants had to organize the supply of the services required for the handling of their goods abroad, because goods were sold abroad only after being shipped to their destination (De Roover 1965; Gras 1939). A merchant could either travel with his merchandise or hire overseas agents to handle his affairs abroad. Employing agents was efficient, because it enabled merchants to avoid the time and risk associated with traveling and to diversify their sales across trade centers. Despite their efficiency, however, agency relations are not likely to be established unless supporting institutions are in place, because agents can act opportunistically and embezzle the merchants' goods.

This chapter examines the reputation-based economic institution – which can be referred to as a coalition – that enabled the Maghribi traders, a group of Jewish traders in the Mediterranean in the eleventh century, to deal with the contractual problem inherent in the merchant-agent transaction. In reputation-based institutions, future rewards or penalties in (auxiliary) economic or social transactions are made conditional on conduct in a central transaction. When effective, this intertransactional linkage enables an individual to credibly commit himself ex ante not to behave opportunistically ex post. In the case of agency relationships, the agent can commit to honesty and hence be trusted. Examining the operation of such institutions requires studying the institutional elements that create the intertransactional linkages and allow future utility to be conditioned on past conduct.