Insurance and Information: Firms as a Commitment Device

We explore the role of firms in insuring risk-averse workers.As a device that allows workers to commit to the delivery of their output, the firm arises endogenously as an alternative to the spot market if workers are suciently risk averse and the firm can base incentive payments on good information.Competition, however, may allow the spot market and explicit contracts to crowd out implicit insurance provided by the firm, even though the latter yields higher welfare.We explain why dierent governance structures coexist in quite homogeneous industries.information;labour;insurance;moral hazard;contracts;principal agent theory

Insurance and Information:Firms as a Commitment Device

We explore the role of firms in insuring risk-averse workers.As a device that allows workers to commit to the delivery of their output, the firm arises endogenously as an alternative to the spot market if workers are suciently risk averse and the firm can base incentive payments on good information.Competition, however, may allow the spot market and explicit contracts to crowd out implicit insurance provided by the firm, even though the latter yields higher welfare.We explain why dierent governance structures coexist in quite homogeneous industries.

Sorting and the output loss due to search frictions

We analyze a general search model with on-the-job search and sorting of heterogeneous workers into heterogeneous jobs. This model yields a simple relationship between (i) the unemployment rate, (ii) the value of non-market time, and (iii) the max-mean wage differential. The latter measure of wage dispersion is more robust than measures based on the reservation wage, due to the long left tail of the wage distribution. We estimate this wage differential using data on match quality and allow for measurement error. The estimated wage dispersion and mismatch for the US is consistent with an unemployment rate of 4-6%. We find that without search frictions, output would be between 7.5% and 18.5% higher, depending on whether or not firms can ex ante commit to wage payments

Education and Efficient Redistribution

Should education be subsidized for the purpose of redistribution? The usual argument against subsidies to education above the primary level is that the rich take up most education, so a subsidy would increase inequality. We show that there is a counteracting effect: an increase in the stock of human capital reduces the return to human capital and, therefore, pre-tax income inequality decreases. We consider a Walrasian world with perfect capital and insurance markets. Hence, in the absence of a strive for redistribution, the market generates the efficient level of investment in human capital. When there is a demand for redistribution, the general equilibrium effects on relative wages might make a subsidy to education an ingredient of a second-best optimal redistribution policy. Stimulating human capital formation results in a compression of the wage distribution, and hence reduces the need for distortionary redistributive taxation. We also study the political viability of education subsidies

Tenure Profiles and Efficient Separation in a Stochastic Productivity Model

This paper provides a new way of analyzing tenure profiles in wages, by modelling simultaneously the evolution of wages and the distribution of tenures. Starting point is the observation that within-job log wages for an individual can be described by random walk. We develop a theoretical model based on efficient bargaining, where both log outside wage and log wage in the current job follow a random walk. This setting allows the application of real option theory. We derive the efficient separation rule, which stipulates that workers switch jobs when the difference between the outside wage and the wage in the current job reaches a threshold. The model fits well the observed distribution of job tenures. Since we observe outside wages only at job start and job separation, our empirical analysis of with job wage growth is based on expected wage growth conditional on the outside wages at both dates. Our modelling allows testing of the efficient bargaining hypothesis. The model is estimated on the PSID