Premium
Multidimensional heterogeneity and the economic importance of risk and matching: evidence from contractual data and field experiments
Author(s) -
Bellemare Charles,
Shearer Bruce
Publication year - 2013
Publication title -
the rand journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 3.687
H-Index - 108
eISSN - 1756-2171
pISSN - 0741-6261
DOI - 10.1111/1756-2171.12023
Subject(s) - matching (statistics) , earnings , sorting , economics , business , econometrics , finance , computer science , statistics , mathematics , programming language
We measure the cost of risk and the benefits of matching heterogeneous workers to risk levels within a firm that pays its workers piece rates. The workers of this firm are heterogeneous in two dimensions: risk preferences and ability. Our results suggest that workers’ willingness to pay to avoid risk is heterogeneous. It can attain 40% of their expected net earnings but averages to only 1%. Moreover, the benefits to the firm of matching are relatively small: profits are predicted to increase by only 2.3%, 4% if we restrict attention to cases where matching is possible. Although labor‐market sorting contributes to this result (the workers in this firm are relatively risk tolerant), it is not the primary cause. More important is the relative homogeneity of risk conditions in this firm that give rise to limited opportunities for matching.