This paper integrates game-theoretical and sociological concepts to conduct a comparative historical analysis of the relations between culture and institutions. It indicates the importance of culture, and in particular cultural beliefs, in determining institutions, in institutional path dependence, and in forestalling intersociety successful adoption of institutions. Examination of institutional change in two premodern societies from the Muslim and the Latin worlds yields that their distinct institutional structures resemble those found by social psychologists to differentiate contemporary developing and developed economies. This suggests the historical importance of distinct cultures and the related societal organizations in economic development.

The authors interpret historical evidence in light of a repeated-game model to conclude that merchant guilds emerged during the late medieval period to allow rulers of trade centers to commit to the security of alien merchants. The merchant guild developed the theoretically required attributes, secured merchants' property rights, and evolved in response to crises to extend the range of its effectiveness, contributing to the expansion of trade during the late medieval period. The authors elaborate on the relations between their theory and the monopoly theory of merchant guilds and contrast it with repeated-game theories that provide no role for formal organization.