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The effects of risk on efficient labor contracts


  • Noel Gaston

    (Tulane University)

  • Randall Wright

    (University of Pennsylvania and Federal Reserve Bank of Minneapolis)


We analyze the effects of productivity risk on the expected utility of workers under efficient labor contracts. With multiplicative uncertainty in productivity, an increase in risk increases workers' expected utility, holding expected profit constant, as has been shown by Rosen. With a technology that is concave in both labor and the productivity shock, however, the opposite is true. We also study the effects of risk on wages, employment and hours, and characterize the dependence of these effects on the curvature of the marginai productivity schedule.

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  • Noel Gaston & Randall Wright, 1991. "The effects of risk on efficient labor contracts," Finnish Economic Papers, Finnish Economic Association, vol. 4(1), pages 2-9, Spring.
  • Handle: RePEc:fep:journl:v:4:y:1991:i:1:p:2-9

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    References listed on IDEAS

    1. John M. Abowd & Orley C. Ashenfelter, 1981. "Anticipated Unemployment, Temporary Layoffs, and Compensating Wage Differentials," NBER Chapters,in: Studies in Labor Markets, pages 141-170 National Bureau of Economic Research, Inc.
    2. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    3. Topel, Robert H, 1984. "Equilibrium Earnings, Turnover, and Unemployment: New Evidence," Journal of Labor Economics, University of Chicago Press, vol. 2(4), pages 500-522, October.
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    Cited by:

    1. Assaad, Ragui & Tunali, Insan, 2002. "Wage formation and recurrent unemployment," Labour Economics, Elsevier, vol. 9(1), pages 17-61, February.

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