Insurance within the firm



Provided by Research Papers in Economics


Insurance within the Firm*

Luigi Guiso^      Luigi Pistaferri^      Fabiano Schivardi^

March 2001

Abstract

The full insurance hypothesis states that shocks to the firm’s performance do not
affect workers’ compensation. In principal-agent models with moral hazard, firms trade
off insurance and incentives to induce workers to supply the optimal level of effort.
We use a long panel of matched employer-employee data to test the theoretical pre-
dictions of principal-agent models of wage determination in a general context where
all types of workers, not only CEOs, are present. We allow for both transitory and
permanent shocks to firm performance and find that firms are willing to fully absorb
transitory fluctuations in productivity but insure workers only partially against perma-
nent shocks. Risk-sharing considerations can account for about 10 percent of overall
earnings variability, the remainder originating in idiosyncratic shocks. Finally, we show
that the amount of insurance varies by type of worker and firm in ways that are con-
sistent with principal-agent models but are hard to reconcile with competitive labor
market models, with or without frictions.

Keywords: Insurance, incentive contracts, matched employer-employees data.
JEL Classification: C33, D21, J33, J41.

*This paper is part of the EU-TMR research project “Specialisation versus diversification: the microe-
conomics of regional development and the spatial propagation of macroeconomic shocks in Europe”. The
Italian “Ministero dell’Università e della Ricerca Scientifica” and the “Taube Faculty Research Fund” at the
Stanford Institute for Economic and Policy Research provided financial support. We thank Cris Huneeus,
Marcel Jansen, Tullio Jappelli, Ed Vytlacil, Sevin Yeltekin, and seminar participants in Salerno, Turin, the
Bank of Italy and the 2001 North-American conference of the Econometric Society for useful discussion and
comments on a preliminary draft, and the INPS for supplying us with the data on workers’ compensation.
The views expressed in this paper are our own and do not involve the Bank of Italy or the EU. We are
responsible for all errors.

Wniversità di Sassari, Ente Luigi Einaudi and CEPR.

^Stanford University, SIEPR and CEPR.

⅛esearch Department, Bank of Italy.



More intriguing information

1. DURABLE CONSUMPTION AS A STATUS GOOD: A STUDY OF NEOCLASSICAL CASES
2. Tax systems and tax reforms in Europe: Rationale and open issue for more radical reforms
3. The name is absent
4. Public Debt Management in Brazil
5. Structural Conservation Practices in U.S. Corn Production: Evidence on Environmental Stewardship by Program Participants and Non-Participants
6. Credit Markets and the Propagation of Monetary Policy Shocks
7. The name is absent
8. LABOR POLICY AND THE OVER-ALL ECONOMY
9. The Values and Character Dispositions of 14-16 Year Olds in the Hodge Hill Constituency
10. Commitment devices, opportunity windows, and institution building in Central Asia
11. Synchronisation and Differentiation: Two Stages of Coordinative Structure
12. The name is absent
13. Sustainability of economic development and governance patterns in water management - an overview on the reorganisation of public utilities in Campania, Italy, under EU Framework Directive in the field of water policy (2000/60/CE)
14. Research Design, as Independent of Methods
15. Keystone sector methodology:network analysis comparative study
16. Comparative study of hatching rates of African catfish (Clarias gariepinus Burchell 1822) eggs on different substrates
17. Cultural Neuroeconomics of Intertemporal Choice
18. The Environmental Kuznets Curve Under a New framework: Role of Social Capital in Water Pollution
19. AJAE Appendix: Willingness to Pay Versus Expected Consumption Value in Vickrey Auctions for New Experience Goods
20. Palvelujen vienti ja kansainvälistyminen