Diversifying Labor Income Risk: Evidence from Income Pooling

Abstract

This paper studies the effects of a contracting innovation which allows individuals
to diversify their labor income risk by sharing labor income above a ceiling into a
common pool. I use novel data from professional baseball players to document sign-up
correlated with an individual’s level of downside protection and sophistication. Players
are significantly more likely to experience an injury before expressing interest in the
contract and are drafted in later rounds. I find some evidence of productivity declines
following sign-up with an instrumental variables approach built around peer networks
confirming these results. Increased monitoring proxied for by players pooling with
teammates reduces the likelihood of players experiencing a decline in performance after
pooling. Players contract with others of similar ability, backgrounds, and occupations
to mitigate information asymmetries. These results provide real-world evidence of the
ability of individuals to hedge labor income risk through peer contracting.

Keywords: Insurance, Peer Contracting, Human Capital, Moral Hazard, Adverse Selection

JEL Classification: J24, G22, D86, G11, D82, M13