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

in the meantime. Premium insurance established a coverage payment for loss due to shipwreck,
piracy, or confiscation of the merchandise abroad in return for a premium payable in advance or,
more generally, after the insured cargo was safely arrived to destination. Shipments, however,
were rarely insured for more than half of their value or even less.
Definition 3 The bill of exchange establishes: τ = − (1 − φ)k ∈ [−k, 0] and τ(y) = τ(x) = τ(¯x)
Definition 4 A pure insurance contract establishes either
τ > 0, τ(y) < 0, and τ(x) = τ(¯x) = 0 or τ = 0, τ(y) < 0, and τ(x) = τ(¯x) > 0
2.2 Optimal Contracts
A contract is optimal if and only if it sustains an optimal allocation of consumption, which is
defined as the solution to the following (concave) problem for some given value of U 2. 9 Further, we
restrict our attention to contractual forms that sustain the optimal allocations for all individually
rational levels of U 2, i.e. regardless of the competitive structure of the financial market. Thus,
the model accounts for the great variety of observed financial relations. Sometimes, an ambitious
young merchant received funds and advice from an older merchant with considerable assets and
political influence. This was the case of the Genoese merchant Ansaldo Bailardo, who concluded a
series of contracts with the all powerful merchant Ingo da Volta, starting with noting in 1156 when
he was still a minor (de Roover, R., 1963, pp. 51-52 and Greif, 1994). Many other times, however,
an economically and politically prominent merchant took funds from ordinary members of society
with some cash. For example, Domenico Gradenigo, who had been born into a centuries’ old
Venetian patrician family, raised an small amount from a widow in 1223 for a round-trip voyage
to Constantinople (Buenger, 1999, and González de Lara, 2005, p. 5).
Program 1:
max
{ci(s)}i=1,2
E{U1[c1(s)]}
s.t. E{U2[c2(s)]} ≥ U 2 (2)
9 The Revelation Principle ensures that any contingent allocation that satisfies the self-selection property, i.e.
which is incentive compatible, can be achieved under a mechanism (a contract). This allows us to convert a problem
of characterizing efficient contracts into a simpler one of characterizing efficient allocations, as in a pure exchange
economy. Then, we only have to find a contract that sustains the optimal allocation and respects all the restrictions.
8