DP3441 Insurance and Information: Firms as a Commitment Device

Author(s): A Lans Bovenberg, Coen N Teulings
Publication Date: July 2002
Keyword(s): commitment, implicit contracts, insurance, moral hazard, principal agent, shirking
JEL(s): D23, D82
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3441

We explore the role of firms in insuring risk-averse workers. As a device that allows workers to commit to the delivery of their output, the firm arises endogenously as an alternative to the spot market if workers are sufficiently risk averse and the firm can base incentive payments on good information. Competition, however, may allow the spot market and explicit contracts to crowd out implicit insurance provided by the firm, even though the latter yields higher welfare. We explain why different governance structures coexist in quite homogeneous industries.