Productivity Shocks, Long-Term Contracts, and Earnings Dynamics

Neele Balke and Thibaut Lamadon

American Economic Review, 2022, vol. 112, issue 7, 2139-77

Abstract: This paper examines how employer- and worker-specific productivity shocks transmit to earnings and employment. We develop an equilibrium search model and characterize the optimal contract offered by firms. Risk-neutral firms provide partial insurance against shocks to risk-averse workers and offer contingent contracts, where payments are backloaded in good times and frontloaded in bad times. The model is estimated on matched employer-employee data from Sweden. Firms absorb persistent worker and firm shocks, with respective passthrough values of 26 and 10 percent. We evaluate the effects of redistributive policies and find that 30 percent of government insurance is undone by crowding out firm insurance.

JEL-codes: D86 H23 J24 J31 J41 J62 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (11)

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DOI: 10.1257/aer.20161622

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