IDEAS home Printed from https://ideas.repec.org/p/sef/csefwp/553.html
   My bibliography  Save this paper

Risk Sharing within the Firm: A Primer

Author

Listed:
  • Marco Pagano

    () (Università di Napoli Federico II, CSEF, EEIF, CEPR and ECGI)

Abstract

Labor income risk is key to the welfare of most people. This paper starts by asking why this risk is mainly insured “within the firm” and not by financial markets, and what restricts the extent of such risk sharing. It identifies four main constraining factors: public unemployment insurance, moral hazard on the workers’ side, limited commitment by firms, and workers’ wage bargaining power. These factors explain three empirical regularities: (i) family firms provide more employment insurance than nonfamily firms; (ii) the former pay lower real wages, and (iii) firms provide less employment insurance where public unemployment benefits are more generous. The paper also explores the connection between risk sharing and firms’ capital structure: highly leveraged firms have more unstable employment, so that greater leverage calls for high wages to compensate employees for job risk; nevertheless, firms may want to lever up strategically in order to offset the bargaining power of labor unions. Hence, the distributional conflict between shareholders and workers may limit risk sharing within the firm. By contrast, bondholders and workers are not necessarily in conflict, as both are harmed by firms’ risk-taking. Finally, firms may also insure employees against the risk due to uncertainty about their own talent, but their capacity to do so is constrained by the fact that, in the presence of labor market competition, talented employees require high wages, making uncertainty about talent uninsurable. Lastly, the paper offers evidence that risk sharing within firms has declined steadily in recent decades and discusses possible explanations.

Suggested Citation

  • Marco Pagano, 2019. "Risk Sharing within the Firm: A Primer," CSEF Working Papers 553, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  • Handle: RePEc:sef:csefwp:553
    as

    Download full text from publisher

    File URL: http://www.csef.it/WP/wp553.pdf
    Download Restriction: no

    More about this item

    Keywords

    risk sharing; insurance; unemployment; social security; wage; implicit labor contracts; family firms.;

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings
    • M51 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Firm Employment Decisions; Promotions
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sef:csefwp:553. 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: (Lia Ambrosio). General contact details of provider: http://edirc.repec.org/data/cssalit.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.