The nantucket whaling industry and the concept of the principal agent

Yesterday I listened to Freakanomics episode 549 “The First Great American Industry” about the American whaling industry and it introduced me to an economic concept I had not known about: the principal agent problem.

The principal agent idea was developed in the 1970’s by a couple economists: the principal is the owner of something and the agent is hired by the owner to manage the something. The principal agent problem is when the interests of these two parties are not in total alignment. In the Nantucket whaleboats the principal were the investors who financed a whaleboat, and the agents were the whaleboat crew. In this case the agents interests were perfectly aligned with the principals in that the crew wanted nothing more than to risk their lives harvesting the most possible whale oil they could on a voyage. These voyages were extremely dangerous and as the technology evolved began lasting longer and longer sometimes up to 4 years. How come the crew was willing to risk their lives and dedicate so much of their time? Each crew member from the lowest up to the capitan was paid a percentage of the voyage’s haul of whale oil. So every time the lookout shouted “Thar she blows” every member of the crew was highly incentivized to jump in a 28 foot (8m) whaleboat the chase and harpoon a 65 foot (20m) sperm whale. Could you imagine trying to get a hourly paid sailer to do that? Just would not work. And that would be an example of princial agent problem.

Can’t wait for the future episodes in Freakanomics whaling series as it is off to a really interesting and educative start! Also has given me a bit of kick to pick back up Moby Dick and finally finish reading it for the second time.

Thanks for reading and feel free to give feedback or comments via email (andrew@jupiterstation.net).