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Insurance and Information: Firms as a Commitment Device

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  • A.L. Bovenberg

    (Tilburg University)

  • Coen N. Teulings

    ()
    (University of Amsterdam)

Abstract

We explore the role of firms in insuring non-verifiable output. As a device that allows workers to commit to thedelivery of their output, the firm arises endogenously as an alternative to the market if workers are sufficiently riskaverse and the firm can base its incentive payments on good information. Competition, however, may allow themarket and explicit contracts to crowd out implicit insurance, even though the latter yields higher welfare.Integrating the principal-agent and shirking models, we explain why different contracting modes coexist in quitehomogeneous industries.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 01-020/3.

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Date of creation: 08 Feb 2001
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Handle: RePEc:dgr:uvatin:20010020

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Web page: http://www.tinbergen.nl

Related research

Keywords: Insurance; implicit contracts; moral hazard; principal agent; commitment; shirking;

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  1. W. Bentley MacLeod & James M. Malcomson, 1986. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Working Papers 585, Queen's University, Department of Economics.
  2. Baker, George & Gibbons, Robert & Murphy, Kevin J, 1994. "Subjective Performance Measures in Optimal Incentive Contracts," The Quarterly Journal of Economics, MIT Press, vol. 109(4), pages 1125-56, November.
  3. Andrei Shleifer & Lawrence H. Summers, 1988. "Breach of Trust in Hostile Takeovers," NBER Chapters, in: Corporate Takeovers: Causes and Consequences, pages 33-68 National Bureau of Economic Research, Inc.
  4. Allen, Douglas W & Lueck, Dean, 1999. "The Role of Risk in Contract Choice," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(3), pages 704-36, October.
  5. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June.
  6. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  7. Krueger, Alan B, 1991. "Ownership, Agency, and Wages: An Examination of Franchising in the Fast Food Industry," The Quarterly Journal of Economics, MIT Press, vol. 106(1), pages 75-101, February.
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Cited by:
  1. Luigi Pistaferri & Luigi Guiso & Fabiano Schivardi, 2010. "Credit within the firm," NBER Working Papers 15924, National Bureau of Economic Research, Inc.

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