The Birth of Insurance Contracts - The Ataturk Institute for Modern ...

usiness. Economic historians have noted the advantage of the commenda over the sea loan in
terms of risk-sharing (Lane, 1966, pp.61-63, and Lopez, 1952, pp.76 and 104) and have associated
the introduction of premium insurance both with the increased use of the bill of exchange for
the financing of overseas trade and with the organization of this trade by means of permanent
representatives abroad (de Roover, F.E., 1945, pp. 173 and 177). Yet, no satisfactory explanation
for the observed selection of contracts have been so far provided.
As the sea loan and the commenda resemble today’s debt and equity contracts, on the one
hand, and fix-rental and sharecropping agreements, on the other hand, modern economic theory
might shed light on their use. 1 Contrary to the Corporate Finance literature, Transaction
Costs Economics, and the Historical Institutional Analysis, this paper, however, ignores the role
of verification/falsification costs, multiple margins for moral hazard, adverse selection, signaling,
incomplete contracting, transaction costs, and institutions for contract enforcement in shaping
contracts. 2 Instead the choice between the sea loan or the commenda derives from simple,
although historically backed, information assumptions: under hidden information, the sea loan
emerges as a second-best because contracts cannot be contingent of the venture’s commercial
profit; under full information, incentive-compatible constraints are relaxed, enabling the adoption
of the first-best better risk-sharing commenda (Townsend, 1982).
The paper, on the contrary, focuses on the role that different financial instruments play to
provide the optimal allocation of risk, in particular, of marine risk. Like today’s debt and equity
contracts, the sea loan and the commenda provided limited liability to both the merchant, who
was exempted from repayment beyond the venture’s assets in case of loss at sea or at the hands
1 The sea loan and the commenda indeed served the double function of financing and organizing overseas trade
using someone else’s capital. In Venice, for example, both types of contract worked as financial instruments through
which business capital together with personal savings, small incomes and legacies were mobilized into risky investments
in overseas trade (Lane, 1973, and González de Lara, 2005). In twelfth-century Genoa, however, the
commenda operated mostly as a labor contract to handle the investor’s business abroad (Greif, 1989 and 1993).
Accordingly, the investing party have been referred to in the literature as sleeping partner, stay at home or
sedentary merchant, principal, stans, and commendator. Similarly, the travelling merchant has been called managing
partner, carrier, factor or agent, tractans or procertans, and accomendatarius. Since this paper focuses on the marine
risk allocation that different contracts entailed, I shall use the terms “financier” and ”merchant.”
2 The companion piece of this paper analyzes the enforcement and information problems underlying the transition
from the sea loan to the commenda in late-medieval Venice and finds that, in this particular episode, institutional
developments that enhanced the state’s ability to verify information enabled the adoption of the better risk-sharing
commenda. EXPLAIN
2