RIEB Discussion Paper Series No.2025-33

Title

Complementarities between Long-Term Relationships and Short-Term Contracts: Case of Early Modern Japan

Abstract

This paper examines the interaction between formal and relational enforcement in early modern Japan, focusing on financial relationships between Daimyo (regional lords) and merchants. Due to class distinctions, loans from merchants to Daimyo lacked legal enforceability, while contracts among merchants were court-enforceable. Some merchants built long-term self-enforcing relationships with Daimyo (becoming Tachiiri), whereas others provided short-term formal loans to underfunded Tachiiri. We develop a model with two markets—one that matches Daimyo with merchants, and the other that matches underfunded Tachiiri with lending merchants—and identify conditions for their co-existence in equilibrium. The analysis shows that merchants value becoming Tachiiri for long-term gains, and that the opportunities for short-term formal lending enhance the sustainability of relational contracts between Daimyo and Tachiiri.

Keywords

Relational contracts; Formal contracts; Matching markets; Financial relationships; Early modern Japan

JEL Classification

C73, D53, D83, D86, N25

Inquiries

Hideshi ITOH
Waseda Business School, Waseda University, JAPAN

Takashi SHIMIZU
Graduate School of Economics, Kobe University, JAPAN

Yasuo TAKATSUKI
Research Institute for Economics and Business Administration
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
Phone: +81-78-803-7036
FAX: +81-78-803-7059