Self Insurance And Efficient Employment Contracts

This paper explores the form of labor contracts (explicit or implicit) that satisfy economic efficiency conditions and compares such contracts with those posited in existing literature. A distinguishing feature of this analysis is the introduction of worker saving into the modeling framework. Previous analyses invoked identity between consumption and earnings in every time period. Consequently, workers can "self-insure" against transitory fluctuations in income by saving or dissaving. After a thorough consideration of observed characteristics of employment and compensation variability over varying demand states, the authors conclude that none of the observations requires risk-shifting from employee to employer as an explanation even though this argument predominates in the contract literature.