Risk Sharing, Sorting, and Early Contracting

34 Pages Posted: 31 Oct 2000

See all articles by Hao Li

Hao Li

University of Toronto - Department of Economics; Queen's University - Department of Economics

Wing Suen

The University of Hong Kong - School of Economics and Finance

Abstract

In an assignment market with uncertainty regarding productive ability of participants, early contracting can occur as participants balance risk sharing and sorting efficiency. More promising agents may contract early with each other because insurance gains outweigh sorting inefficiency, whereas less promising agents wait. It can also happen in equilibrium that more promising job applicants contract early with less promising firms. Such worker-driven equilibria may arise when applicants are more risk-averse, have greater uncertainty regarding their quality, or face a tighter market and when production exhibits increasing returns to firms' qualities. Early contracting then unambiguously hurts the more promising firms that choose to wait.

Suggested Citation

Li, Hao and Suen, Wing C., Risk Sharing, Sorting, and Early Contracting. Available at SSRN: https://ssrn.com/abstract=241057 or http://dx.doi.org/10.2139/ssrn.241057

Hao Li (Contact Author)

University of Toronto - Department of Economics ( email )

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Canada
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Queen's University - Department of Economics ( email )

Dunning Hall
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Canada
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HOME PAGE: http://www.econ.queensu.ca/pub/faculty/li/

Wing C. Suen

The University of Hong Kong - School of Economics and Finance ( email )

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Hong Kong
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