Collusion at Champagne: Or Who Will Monitor the Monitors?A Lesson from History

Abstract

Monitors hired to minimize cheating are themselves vulnerable to collusion and extortion. In this paper we first attempt to understand why an important historical institution – that of the trade fairs at Champagne with their private judges – survived for centuries instead of instantly crumbling in the face of overwhelming incentives to collude – and then derive implications for the larger problem of “monitoring the monitor”. We argue that the seminal paper on the Champagne fairs –by Milgrom, North and Weingast – is not collusion-proof and hence cannot explain the survival of this institution. Drawing on historical evidence we build a model which better fits the historical reality of the Champagne fairs and is invulnerable to collusion, extortion and “reverse extortion” (unscrupulous clients threatening to smear a monitor’s reputation unless bribed). Our model contains a competing fair and a guild. We contrast our insights with other literature on collusion. Our analysis highlights the crucial roles of competition among monitors, the existence of a collective body to organize coordinated punishment of monitors caught colluding, and network effects among a monitor’s customers that would exacerbate any punishment.