Working Paper: CEPR ID: DP3441
Authors: A. Lans Bovenberg; Coen N. Teulings
Abstract: 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 sufficiently 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 different governance structures coexist in quite homogeneous industries.
Keywords: commitment; implicit contracts; insurance; moral hazard; principal agent; shirking
JEL Codes: D23; D82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk-averse suppliers (D81) | firms (L20) |
| firms (L20) | output delivery (C67) |
| risk-averse suppliers (D81) | output delivery (C67) |
| firms (L20) | overall welfare (I31) |