Econometrica: May, 2021, Volume 89, Issue 3
Asset Pricing with Endogenously Uninsurable Tail Risk
https://doi.org/10.3982/ECTA15142
p. 1471-1505
Hengjie Ai, Anmol Bhandari
This paper studies asset pricing and labor market dynamics when idiosyncratic risk to human capital is not fully insurable. Firms use longâterm contracts to provide insurance to workers, but neither side can fully commit; furthermore, owing to costly and unobservable retention effort, workerâfirm relationships have endogenous durations. Uninsured tail risk in labor earnings arises as a part of an optimal riskâsharing scheme. In equilibrium, exposure to the tail risk generates higher aggregate risk premia and higher return volatility. Consistent with data, firmâlevel labor share predicts both future returns and passâthroughs of firmâlevel shocks to labor compensation.
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Supplement to "Asset Pricing with Endogenously Uninsurable Tail Risk"
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