Investment and Diversification in the American Whaling Industry

This article analyzes the connection between investment decisions and financing arrangements in the nineteenth-century American whaling industry. Managers of whaling ventures shared their risks by selling some equity claims but retained a substantial portion due to moral hazard considerations. As a result, they had lit-tle incentive to consider the covariance between their own returns, and those of others, in planning their voyages. This stifled diversity in whaling voyages and increased industry-wide risk. The analysis suggests a link between financial market development, or the extent of risk sharing in financial markets, and the range of economic activities pursued. n October 1851 news of the whaling fleet’s summer season in the North Pacific reached American ports. The reports were devastating: due to the unexpectedly early incursion of ice in the Bering Straits, many of the vessels were badly damaged, and eight were lost. Condi-tions were so difficult that even the vessels that escaped serious harm were unable to pursue whales. In a letter home, the first mate of on