Trade Without Law: Private-Order Institutions in Mexican California

Trade prospered in absence of law in California during the 1830s and 1840s. Merchants, through intermerchant trade and the partnerships they organized to buy goods abroad, played a central role in trade. This article examines the privateorder institution that facilitated intermerchant trade. The hypothesis is that a particular type of private-order institution, a coalition, governed agency relations among merchants in California. Within the coalition, a reputation mechanism mitigated the commitment problem inherent in having individuals handle goods that they did not own by linking a merchant's past behavior and his future payoff. Evidence from the merchants' business correspondence supports the hypothesis. A gametheoretic model of a coalition is presented. The model provides insight into the punishment merchants imposed on cheaters, the expansion of the coalition in the 1830s, and its collapse around the time of the gold rush in 1848-1849