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The Negative Trade-off Between Risk and Incentives: Evidence from the American Whaling Industry

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  • Eric Hilt

Abstract

This paper analyzes the trade-off between risk and incentives in the share contracts of the American whaling industry. Using a newly-collected panel of 5,378 individuals who sailed on whaling voyages from 1855-68, the response of sailors' compensation to an increase in risk is estimated. The risks used to identify this response resulted from the commerce-raiding naval vessels of the Confederacy during the Civil War. As the Confederate cruisers sailed primarily in the Atlantic, and therefore posed far less of a threat to whaling voyages to other oceans, a quasi-experimental approach, focussing on the differences between Atlantic voyages compared to others, is implemented. The results support the existence of a negative trade-off between risk and incentives in the industry's contracts. Moreover, evidence is found of selection among less risk-averse sailors and merchants into riskier voyages during the war.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11960.

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Date of creation: Jan 2006
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Handle: RePEc:nbr:nberwo:11960

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  1. Holmstrom, Bengt & Milgrom, Paul, 1987. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Econometrica, Econometric Society, vol. 55(2), pages 303-28, March.
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Cited by:
  1. Grund, Christian & Sliwka, Dirk, 2006. "Performance Pay and Risk Aversion," IZA Discussion Papers 2012, Institute for the Study of Labor (IZA).

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