Risk Sharing and Rent Sharing in the Labor Market

Abstract

The large literature on risk sharing and rent sharing between employers and employees in the industrial sector of a country consistently argues that unless such interactions are factored in, the wage–employment variations across industries cannot be adequately explained in light of available evidence. This chapter reviews the concerned literature, draws on available sources to offer an analytical basis, and develops an econometric exercise to measure the degree of risk aversion across various industry types in India. The aspect of rent sharing, i.e., sharing a portion of the profit as an outcome of productivity improvement, is a common practice in many modern industrial and service sector firms where monitoring is costly and where it lends itself easily to problems of moral hazard. The risk sharing, on the other hand, is often part of a contract designed between an employer and a worker, where the contracting parties bargain over the distribution of gains and losses contingent on states of nature facing the firm. We show that machinery and steel industries in India show larger impact of risk sharing over a considerable period of time.