Risk sharing in labor contracts

The paper studies risk sharing between risk-averse workers and a risk-averse or risk-neutral firm within a contingent labor contract. The contract determines the wage and employment probability for each realization of the price of the firm's product and alternative value of a worker's time. The paper shows that the optimal contract distributes risk efficiently between the employed workers and the firm, and that only a risk-neutral firm should guarantee a fixed waye. Nonetheless, the overall risk sharing is imperfect, and this entails that the employment may be too high for a socially efficient production, and that relatively attractive realizations of the unknown variables may involve relatively low wages and profits. The paper also undertakes a comparative-tatic analysis of changes in the riskiness of the price of the firm's product and of the alternative value of a worker's time.