Incomplete Information, Risk Shifting, and Employment Fluctuations
This paper explores one of the ways in which acceptance of the hypothesis that labor market transactions involve arrangements for shifting risk from workers to employers strengthens the case for accepting the hypothesis that incomplete information is the critical factor in producing the positive effect of aggregate demand for output on aggregate employment. The analysis shows that the introduction of risk-shifting arrangements into models of incomplete information eliminates the dependence of the relation between aggregate demand and aggregate employment on the relative strengths of the usual substitution and income effects on labor supply of perceived real wage rates or perceived real interest rates. In addition, the analysis shows that the apparent fact that workers choose an amount of risk shifting that gives them constant nominal wage rates implies that incomplete information would produce a positive effect of aggregate demand on aggregate employment. The key to these results is that risk shifting allows workers to use the value of product associated with high levels of demand to supplement the income associated with low levels of demand. Consequently, they can choose high employment instates of high demand without causing a corresponding reduction in their expected marginal utility of consumption.
|Date of creation:||Aug 1980|
|Date of revision:|
|Publication status:||published as Grossman, Herschel I. "Incomplete Information, Risk Shifting, and Employment Fluctuations." Review of Economic Studies, Vol. XLVIII, No. 152 (April 1981), pp. 189-197.|
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- Seater, John J., 1977. "A unified model of consumption, labor supply, and job search," Journal of Economic Theory, Elsevier, vol. 14(2), pages 349-372, April.
- Herschel I. Grossman, 1980. "Risk Shifting, Unemployment Insurance, and Layoffs," NBER Working Papers 0424, National Bureau of Economic Research, Inc.
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- Grossman, Herschel I, 1977. " Risk Shifting and Reliability in Labor Markets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 79(2), pages 187-209.
- Grossman, Herschel I, 1979. "Employment Fluctuations and the Mitigation of Risk," Economic Inquiry, Western Economic Association International, vol. 17(3), pages 344-58, July.
- repec:cup:cbooks:9780521068659 is not listed on IDEAS
- Barro, Robert J., 1977. "Long-term contracting, sticky prices, and monetary policy," Journal of Monetary Economics, Elsevier, vol. 3(3), pages 305-316, July.
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