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The negative trade-off between risk and incentives: Evidence from the american whaling industry

  • Hilt, Eric

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 5378 individuals who sailed on more than 1000 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 focusing on the differences between Atlantic voyages compared to others is implemented. The results are consistent with 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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Article provided by Elsevier in its journal Explorations in Economic History.

Volume (Year): 45 (2008)
Issue (Month): 4 (September)
Pages: 424-444

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Handle: RePEc:eee:exehis:v:45:y:2008:i:4:p:424-444
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622830

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  1. Allen, Douglas W & Lueck, Dean, 1999. "The Role of Risk in Contract Choice," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(3), pages 704-36, October.
  2. Allen, Robert C. & Keay, Ian, 2004. "Saving the Whales: Lessons from the Extinction of the Eastern Arctic Bowhead," The Journal of Economic History, Cambridge University Press, vol. 64(02), pages 400-432, June.
  3. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002. "How Much Should We Trust Differences-in-Differences Estimates?," NBER Working Papers 8841, National Bureau of Economic Research, Inc.
  4. Craig, Lee A. & Fearn, Robert M., 1993. "Wage Discrimination and Occupational Crowding in a Competitive Industry: Evidence from the American Whaling Industry," The Journal of Economic History, Cambridge University Press, vol. 53(01), pages 123-138, March.
  5. George P. Baker & Brian J. Hall, 2004. "CEO Incentives and Firm Size," Journal of Labor Economics, University of Chicago Press, vol. 22(4), pages 767-798, October.
  6. Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
  7. Rajesh Aggarwal & Andrew A. Samwick, 1998. "The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation," NBER Working Papers 6634, National Bureau of Economic Research, Inc.
  8. Daniel A. Ackerberg & Maristella Botticini, 1999. "Endogenous Matching and the Empirical Determinants of Contract Form," Boston University - Institute for Economic Development 92, Boston University, Institute for Economic Development.
  9. Pierre-André Chiappori & Bernard Salanié, 2002. "Testing Contract Theory : A Survey of Some Recent Work," Working Papers 2002-11, Centre de Recherche en Economie et Statistique.
  10. Stiglitz, Joseph E, 1974. "Incentives and Risk Sharing in Sharecropping," Review of Economic Studies, Wiley Blackwell, vol. 41(2), pages 219-55, April.
  11. Eric Hilt, 2004. "Incentives in Corporations: Evidence from the American Whaling Industry," NBER Working Papers 10403, National Bureau of Economic Research, Inc.
  12. Hilt, Eric, 2007. "Investment and Diversification in the American Whaling Industry," The Journal of Economic History, Cambridge University Press, vol. 67(02), pages 292-314, June.
  13. Allen, Douglas W., 2002. "The British Navy Rules: Monitoring and Incompatible Incentives in the Age of Fighting Sail," Explorations in Economic History, Elsevier, vol. 39(2), pages 204-231, April.
  14. Amy Finkelstein & Kathleen McGarry, 2006. "Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 96(4), pages 938-958, September.
  15. Ellickson, Robert C, 1989. "A Hypothesis of Wealth-Maximizing Norms: Evidence from the Whaling Industry," Journal of Law, Economics and Organization, Oxford University Press, vol. 5(1), pages 83-97, Spring.
  16. Ran Abramitzky, 2008. "The Limits of Equality: Insights from the Israeli Kibbutz," The Quarterly Journal of Economics, MIT Press, vol. 123(3), pages 1111-1159, August.
  17. Canice Prendergast, 2002. "The Tenuous Trade-off between Risk and Incentives," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1071-1102, October.
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