Risk Sharing through Labor Contracts - Risk Aversion, Market Incompleteness and Employment
Labor contracts are a way of sharing idiosyncratic production risks between entrepreneurs and workers, especially when such risks are too complex for contingent contracts to be written on them. So it is important to understand how equilibrium employment and wages are affected by risk re-lated factors, such as risk aversion of entrepreneurs and workers, risk sharing opportunities in the economy etc. The paper develops a general equilibrium model with several sectors of production which are subject to idiosyncratic productivity shocks, two inputs - labor and capital - and stock markets which diversify sectoral risks but not completely. We prove the existence of equilibrium for this general model. The model is then parameterized by CRRAutility functions. We prove that the equilibriumemployment levels vary inversely with the coefficient of relative risk aversion of agents under certain conditions. Numerical simulations show that over a range of the coefficient employment levels are higher when markets are complete than when they are not. A substantive implication of the comparative static results is that a low paying, productively less efficient alter-native to working for private firms may be desirable as an insurance instrument.
|Date of creation:||01 Aug 2000|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew Atkeson & Patrick J. Kehoe, 1993.
"Social Insurance and Transition,"
NBER Working Papers
4411, National Bureau of Economic Research, Inc.
- Milgrom, P. & Shannon, C., 1991.
"Monotone Comparative Statics,"
11, Stanford - Institute for Thoretical Economics.
- Michele Boldrin & Michael Horvath, 1994.
"Labor Contracts and Business Cycles,"
1068, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Paul Gomme & Jeremy Greenwood, 1992.
"On the cyclical allocation of risk,"
Discussion Paper / Institute for Empirical Macroeconomics
71, Federal Reserve Bank of Minneapolis.
- Gomme, P. & Greenwood, J., 1993. "On the Cyclical Allocation of Risk," RCER Working Papers 355, University of Rochester - Center for Economic Research (RCER).
- Gomme, P. & Greenwood, J., 1992. "On the Cyclical Allocation of Risk," UWO Department of Economics Working Papers 9205, University of Western Ontario, Department of Economics.
- Azariadis, Costas, 1975. "Implicit Contracts and Underemployment Equilibria," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1183-1202, December.
- Dewatripont, M & Roland, G, 1992.
"Economic Reform and Dynamic Political Constraints,"
Review of Economic Studies,
Wiley Blackwell, vol. 59(4), pages 703-30, October.
- Arnott, Richard & Stiglitz, Joseph E, 1991. "Moral Hazard and Nonmarket Institutions: Dysfunctional Crowding Out or Peer Monitoring?," American Economic Review, American Economic Association, vol. 81(1), pages 179-90, March.
- Michael Magill & Martine Quinzii, .
"Incentives And Risk Sharing In A Stock Market Equilibrium,"
Department of Economics
96-12, California Davis - Department of Economics.
- Martine Quinzii & Michael Magill, 2003. "Incentives and Risk Sharing in a Stock Market Equilibrium," Working Papers 9612, University of California, Davis, Department of Economics.
- Fernandez, Raquel & Rodrik, Dani, 1991. "Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty," American Economic Review, American Economic Association, vol. 81(5), pages 1146-55, December.
- Cheng, Hsueh-Cheng & Magill, Michael J P & Shafer, Wayne J, 1987. "Some Results on Comparative Statics under Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(2), pages 493-507, June.
- Villas-Boas, J. Miguel, 1997. "Comparative Statics of Fixed Points," Journal of Economic Theory, Elsevier, vol. 73(1), pages 183-198, March.
When requesting a correction, please mention this item's handle: RePEc:ecm:wc2000:1767. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.