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

enemies” are assumed to be verifiable, the model considers two extreme scenarios regarding the
ability of the State to verify the commercial return. Under hidden information the commercial
returns is non-verifiable, at any cost, but the State can force the merchant pay out the minimum
possible commercial return, x. Under the full information structure the commercial return is
verifiable without any private cost for the financier.
2.1 Contracts
We consider allocations that can be obtained by means of a contract enabling the funding of
the venture and specifying transfers from the merchant to the financier both at the first and
at the second date. Whereas first-date transfers τ ∈ ℜ are prior to the realization of the state
and, accordingly, are independent of it, second-date transfers τ(s) are contingent on the state.
A contract will result in consumption schedules for the merchant and the financier, c1 and c2
respectively, where c1 := c1(s) = k1 − k + s − [τ + τ(s)] and c2 := c2(s) = k2 + [τ + τ(s)]. 6
Sometimes the merchant lacked the capital required to undertake a sea venture. Others,
however, he was a man of substance who could fund the venture he managed in whole or in part
if he so wished. 7 Let φ k, with φ ∈ [0, 1] denotes the capital contributed by the merchant to the
venture, so that (1 − φ)k ∈ [0, k] is the capital raised from the investor.
During the twelfth and thirteenth centuries, merchants typically relied on sea loans and com-
menda contracts, even when they were endowed with the resources required to finance the venture
6 These consumption schedules capture the fact that the venture’s returns first accrued to the merchant, who need
to cover the fix cost k to generate the return s. This notation is better suited for the case in which the merchant
owned the venture and hence was the residual claimant. Alternatively, consumption schedules can be expressed as
c1(s) = k1 + ˘τ + ˘τ(s) and c2(s) = k2 − k + s − ˘τ − ˘τ(s), where ˘τ + ˘τ(s) = [−k − τ] + [s − τ(s)] are to be understood
as a contingent salary the financier pays to the the merchant for handling his business abroad. It is worth noting
that ownership is irrelevant to the model’s results. This is so because, on the one hand, the model is robust to the
allocation of property rights (it considers all levels of bargaining power subject to individual rationality) and, on
the other hand, there is no incomplete contracting and hence the allocation of control rights is unimportant.
7 As the Consolat del Mar of Barcelona pointed out many merchants were propertyless men who owned nothing
on their own among all that they carried (Pryor, 1983, p.162). We know, however, about many merchants with
considerable assets. For example, according to the the estimo of 1207, Zaccaria Stagnario was among the richest
men in Venice, yet he raised substantial amounts through commenda contracts to finance his numerous trips to
the Levant (Buenger, 1999). Examples of merchants who invested in other merchant’s ventures abound. The
extant Venetian documentation for he period 1021-1261 make reference to 435 sea loans and commenda contracts
in which 233 merchants are mentioned. Excluding the merchants who appear only once, and could not hence show
up performing both roles, 36 percent of the merchants invested in other merchants’ ventures and over 72 percent
of the 83 merchant’s families who appear twice or oftener had members who acted as merchants and members who
acted as investors (Morozzo della Rocca and Lombardo, 1940 and 1953, and González de Lara, 2005, p. 21).
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