Managing Agency Problems in Early Shareholder Capitalism:
Abstract: How did early capitalists manage agency problems? We examine the pattern of captain-ownership among vessels engaged in transatlantic shipping during 1744-1785, at the dawn of shareholder capitalism. The typical vessel had four owners, each contributing capital towards purchase/operation. A vessel traveled far from the oversight of its owners. When a vessel sank, was captured by “privateers,” or arrived sufficiently late that its cargo was devalued, it was rarely clear whether the culprit was poor captaincy or unavoidable hazards. While owners were concerned with the freight and vessel, a captain was primarily concerned with his life and was subject to classic shirking incentives. In sum, one can conceive of a vessel as a floating corporation with the captain as CEO, subject to familiar principal-agent problems. We analyze the performance incentives used by shipowners to motivate captains, notably sales commissions, bonuses, and partial ownership of the vessel. In theory, these incentives – particularly vessel ownership – should be used selectively to deal with specific hazards that create divergent incentives between captain and owners. We then exploit a unique database of Liverpool vessels to explore the pattern of vessel ownership. We find that captain ownership is more prevalent on voyages where hazards are more likely. Also, captain-owned vessels are less likely to sink or be captured, and more likely to arrive late than their non-captain-owned counterparts.