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Limited Capital Market Participation and Human Capital Risk

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  • Jonathan B. Berk
  • Johan Walden

Abstract

By introducing a labor market into the neoclassical asset pricing model, limited capital market participation can be an equilibrium outcome. Labor contracts are derived endogenously as part of a dynamic equilibrium in a production economy. Firms write labor contracts that insure workers, allowing agents to achieve a Pareto optimal allocation even when the span of asset markets is restricted to just stocks and bonds. Capital markets facilitate this risk sharing because it is there that firms offload the labor market risk they assumed from workers. In effect, by investing in capital markets, investors provide insurance to wage earners who then optimally choose not to participate in capital markets.

Suggested Citation

  • Jonathan B. Berk & Johan Walden, 2013. "Limited Capital Market Participation and Human Capital Risk," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 3(1), pages 1-37.
    • Handle: RePEc:oup:rasset:v:3:y:2013:i:1:p:1-37.
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    3. Luigi Guiso & Luigi Pistaferri, 2020. "The insurance role of the firm," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 45(1), pages 1-23, March.
    4. Donangelo, Andres & Gourio, François & Kehrig, Matthias & Palacios, Miguel, 2019. "The cross-section of labor leverage and equity returns," Journal of Financial Economics, Elsevier, vol. 132(2), pages 497-518.
    5. Shai Bernstein & Timothy McQuade & Richard R. Townsend, 2017. "Do Household Wealth Shocks Affect Productivity? Evidence from Innovative Workers During the Great Recession," NBER Working Papers 24011, National Bureau of Economic Research, Inc.
    6. Rettl, Daniel A. & Stomper, Alex & Zechner, Josef, 2016. "The stability of dividends and wages: Effects of competitor inflexibility," CFS Working Paper Series 549, Center for Financial Studies (CFS).
    7. Pagano, Marco, 2020. "Risk Sharing Within the Firm: A Primer," Foundations and Trends(R) in Finance, now publishers, vol. 12(2), pages 117-198, October.
    8. Barney Hartman‐Glaser & Hanno Lustig & Mindy Z. Xiaolan, 2019. "Capital Share Dynamics When Firms Insure Workers," Journal of Finance, American Finance Association, vol. 74(4), pages 1707-1751, August.
    9. Andreas Fagereng & Luigi Guiso & Luigi Pistaferri, 2016. "Back to Background Risk," EIEF Working Papers Series 1602, Einaudi Institute for Economics and Finance (EIEF), revised Jan 2016.
    10. Matthijs Breugem & Stefano Colonnello & Roberto Marfè & Francesca Zucchi, 2020. "Dynamic Equity Slope," Carlo Alberto Notebooks 626, Collegio Carlo Alberto.
      • Matthijs Breugem & Stefano Colonello & Roberto Marfè & Francesca Zucchi, 2020. "Dynamic Equity Slope," Working Papers 2020:21, Department of Economics, University of Venice "Ca' Foscari".
    11. Roberto Marfè, 2015. "Labor Rigidity and the Dynamics of the Value Premium," Carlo Alberto Notebooks 429, Collegio Carlo Alberto.
    12. Roberto Marfè, 2017. "Income Insurance and the Equilibrium Term Structure of Equity," Journal of Finance, American Finance Association, vol. 72(5), pages 2073-2130, October.
    13. Andreas Fagereng & Luigi Guiso & Luigi Pistaferri, 2018. "Portfolio Choices, Firm Shocks, and Uninsurable Wage Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 85(1), pages 437-474.
    14. Rahul Roy & Santhakumar Shijin, 2018. "Dissecting anomalies and dynamic human capital: The global evidence," Post-Print hal-01660135, HAL.
    15. Matthijs Breugem & Stefano Colonnello & Roberto Marfè & Francesca Zucchi, 2020. "Dynamic Equity Slope," Carlo Alberto Notebooks 626, Collegio Carlo Alberto.
    16. Rao, Ramesh K.S., 2015. "The public corporation as an intermediary between “Main Street” and “Wall Street”," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 64-82.
    17. Hengjie Ai & Anmol Bhandari, 2021. "Asset Pricing With Endogenously Uninsurable Tail Risk," Econometrica, Econometric Society, vol. 89(3), pages 1471-1505, May.
    18. Roberto Marfè, 2016. "Labor Rigidity, In ation Risk and Bond Returns," Carlo Alberto Notebooks 461, Collegio Carlo Alberto.
    19. Mehran Ebrahimian & Jessica Wachter, 2020. "Risks to Human Capital," NBER Working Papers 26823, National Bureau of Economic Research, Inc.
    20. Adamu Jibir & Musa Abdu & Abdullahi Buba, 2023. "Does Human Capital Influence Labor Productivity? Evidence from Nigerian Manufacturing and Service Firms," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 14(2), pages 805-830, June.
    21. Di Maggio, Marco & Kermani, Amir & Ramcharan, Rodney & Yao, Vincent & Yu, Edison, 2022. "The pass-through of uncertainty shocks to households," Journal of Financial Economics, Elsevier, vol. 145(1), pages 85-104.
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    23. Roy, Rahul & Shijin, Santhakumar, 2022. "The saving, human wealth and asset pricing nexus: Evidence from around the world," Economic Systems, Elsevier, vol. 46(2).
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    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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