BONDING AND THE AGENCY PROBLEM - EVIDENCE FROM THE ROYAL AFRICAN COMPANY, 1672-1691

The paper focuses on the argument found extensively in the literature that the managers of early chartered companies operated in their own s elf-interest and thus were these companies own worst enemies. Using re cent work from both the labor and the efficient contracts literature a nd archival material from one of these companies-the Royal African Com pany-I argue that the view prevalent in the literature greatly oversta tes the level of agent opportunism. The contract between the Royal Afr ican Company and its managers was well designed to mitigate moral haza rd. While the Company paid a non-compensating differential, the intere sting feature of the contract is the use of bonding. This study, while arguing that these early chartered companies did attenuate managerial opportunism, describes a fully functioning bonding market for manager s. The paper also argues that the Royal African Company, because of an inappropriate head office structure (one which was imposed on the com pany in its charter), was unable to develop an internal trust network between subordinate and superior which would have helped further to re duce moral hazard. (C) 1994 Academic Press, Inc.