Abstract
We study how the presence of non-exclusive contracts limits the amount of insurance provided in a decentralized economy. We consider a dynamic Mirrleesian economy in which agents are privately informed about idiosyncratic labor productivity shocks. Agents sign privately observable insurance contracts with multiple firms (i.e., they are non-exclusive). Contracts specify both labor and savings requirements. Firms have no restriction on the contracts they can offer and interact strategically. In equilibrium, contrary to the case with exclusive contracts, a standard Euler equation holds, and the marginal rate of substitution between consumption and leisure is equated to the worker's marginal productivity. Also, each agent receives zero net present value of transfers. These conditions imply the equilibrium allocation is equivalent to a standard incomplete markets model. To sustain this equilibrium, more than one firm must be active and must also offer latent contracts to deter deviations to more profitable contingent contracts. In this environment, the non-observability of contracts removes the possibility of additional insurance beyond self-insurance.
Highlights
What type of contractual arrangements are available to workers in a decentralized economy when firms compete for the provision of social insurance? In this paper, we study how, in a decentralized economy, the presence of non-exclusive contracts endogenously limits the contracts offered, and the amount of insurance
We find that competition and non-exclusivity of insurance contracts significantly reduce the amount of insurance provided: the equilibrium allocation in our environment is equivalent to a self-insurance economy, and only linear contracts are offered
Paxson and Sicherman (1994) look at the number of concurrent labor relationships held by survey respondents of the Panel Study of Income Dynamics (PSID) between 1977 and 1990 and the Current Population Survey (CPS) of 1991
Summary
What type of contractual arrangements are available to workers in a decentralized economy when firms compete for the provision of social insurance? In this paper, we study how, in a decentralized economy, the presence of non-exclusive contracts endogenously limits the contracts offered, and the amount of insurance. Monitoring all the transactions an agent might engage in with other firms is very costly for an individual firm, especially if these relationships include activities in the informal labor market, private savings, and the ability to transfer leisure into consumption through either home production or shopping time (see Aguiar and Hurst, 2005). Motivated by these considerations, the key friction addressed in this paper is the non-exclusivity and non-observability of contractual relations. We characterize the optimal contract under the assumption that none of the labor and credit relations an agent engages in can be observed by an individual firm in an economy where the agent’s productivity is privately known by the worker. We interpret this friction as reflecting both the costs that a firm might incur when monitoring the transactions agents engage in and the inability of firms to offer contracts contingent on the agents’ actions with other firms in the economy
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
