General Average and All the Rest: The Law and Economics of Early Modern Maritime Risk Mitigation

The environment of pre-modern maritime trade activities was, in economists’ terms, one of uncertainties, high risks, vast information asymmetries, augmented agency problems, weak enforcement of contracts, and fragile protection of property rights. Dealing with such a tough environment was a foremost institutional challenge for pre-modern contemporary merchants, jurists, and rulers. Maritime trade is where the institutional cutting-edge could be found. This is where new and innovative organizational solutions, such as general average, insurance and the business corporation, were designed.

Traditional historical analysis is good at reconstructing the pattern of development of maritime trade institutions, but it is not as good at explaining the timing of origins and path of evolution of these institutions. I will use here a theoretical framework that combines insights from Frank Knight, Douglass North and Robert Scott. Knight calls attention to the role of information in the shift from uncertainty to risk and the development of insurance. North calls our attention to the role of information in reducing transaction costs and enhancing growth. Scott reminds us that institutions involve contractual drafting and that contracts can deal with information shortage and information generation. This framework focuses our attention on how to solve the informational challenges with respect to risk assessment and pricing and contractual. It takes us a long way forward in understanding the history of risk mitigation trade institutions.

The history of organizational solutions for mitigation of maritime uncertainties and risks, from general average and sea loan to insurance and the business corporation benefits from and contribute to the theory of institutional development more generally.