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

initial wealth.
TO DO:
1. Review literature on the institutions for contract enforcement that motivated merchants to
refrain from embezzling the investor capital and flee to avoid sanctions
2. Evidence on the observability/verifiability of losses at sea or at the hands of enemy men
3. Evidence on the changing information structure
4. Evidence on the institutional arrangements that reduced the cost of enforcing payments
from the venture’s returns
3.3 Predictions
1. For the sea loan or the commenda to be optimal, the inequality (11) must be satisfied.
This implies
(a) ˜t very high
max{E[c1(x)] − c1(y)} = E[x] − ˜t ≪ ˜t − y = min{c2(x) − c2(y)}
Evidence: In the twelfth century, sea loans typically charged yearly interest rates above
33 percent. Charges of 40 or 50 percent were not uncommon for voyages from Italy or
Constantinople to Alexandria or Syria (de Roover, 1963, p.53, and González de Lara,
2005). Likewise, commenda contracts—which provided exactly the same downside
insurance than the sea loan, τ(y) = y— customarily remunerate capital with three
fourths of the commercial profit. (meaning the return minus the capital invested).
(b) E[x] − ˜t
Evidence: According to de Roover (1963, p.54), the high rates charged in sea loans
”absorbed most of the merchant’s trading profit.”
2. The severe drop on insurance rates lends empirical support to the theoretical explanation
for the selection of alternative contracts. The model predicts the use of the sea loan (and the
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