Abstract
The presence of uncertainty and risk aversion compounds the effects of labor market imperfections and thereby widens the marginal revenue product of labor (MRPL) and wage gap. This paper analyzes the case of uncertainty in labor efficiency or job separation and its implications for managerial decisions. We show that when labor efficiency is subject to stochastic fluctuations, risk aversion leads to a gap between the MRPL and the wage even under conditions of perfect competition. If job separation costs are stochastic, the gap is due to monopsony power and the influence of risk aversion.
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