Long-term Risk-Sharing Wage Contracts in an Economy Subject to Permanent and Temporary Shocks
This article develops and tests an implication of risk shifting in labor market impl icit contracts. A two-period implicit contract model is presented. Th e optimal contract, in the face of bankruptcy constraints, calls for a real wage that responds asymmetrically to permanent and temporary s hocks to the firm's revenue function. In particular, the real wage re sponds more to a permanent shock than to a temporary shock of the sam e size. This implication is tested on twelve four-digit Standard Indu strial Classification code industries. Eleven of the twelve industrie s sampled show evidence that supports the asymmetric wage response im plication. Copyright 1988 by University of Chicago Press.