Asset Pricing with Endogenously Uninsurable Tail Risk

Working Paper No. 24972 This paper studies asset pricing in a setting in which idiosyncratic risk in human capital is not fully insurable. Firms use long-term contracts to provide insurance to workers, but neither side can commit to these contracts; furthermore, worker-firm relationships have endoge...

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Bibliographic Details
Published in:NBER Working Paper Series 2018-08, p.24972
Main Authors: Ai, Hengjie, Bhandari, Anmol
Format: Article
Language:English
Subjects:
Capital depreciation
Consumption
Discount rates
Earnings
Economic models
Economic theory
Equilibrium
Human capital
Insurance
International finance
Labor market
Labor productivity
Moral hazard
Operating leverage
Prices
Risk sharing
Wages & salaries
Workers
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Summary:Working Paper No. 24972 This paper studies asset pricing in a setting in which idiosyncratic risk in human capital is not fully insurable. Firms use long-term contracts to provide insurance to workers, but neither side can commit to these contracts; furthermore, worker-firm relationships have endogenous durations owing to costly and unobservable effort. Uninsured tail risk in labor earnings arises as a part of an optimal risk-sharing scheme. In the general equilibrium, exposure to the resulting tail risk generates higher risk premia, more volatile returns, and variations in expected returns across firms. Model outcomes are consistent with the cyclicality of factor shares in the aggregate, and the heterogeneity in exposures to idiosyncratic and aggregate shocks in the cross section.
ISSN:0898-2937
DOI:10.3386/w24972