Asset Pricing With Endogenously Uninsurable Tail Risk

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This paper studies asset pricing and labor market dynamics when idiosyncratic risk to human capital is not fully insurable. Firms use long-term contracts to provide insurance to workers, but neither side can fully commit; furthermore, owing to costly and unobservable retention effort, worker-firm relationships have endogenous durations. Uninsured tail risk in labor earnings arises as a part of an optimal risk-sharing scheme. In equilibrium, exposure to the tail risk generates higher aggregate risk premia and higher return volatility. Consistent with data, firm-level labor share predicts both future returns and pass-throughs of firm-level shocks to labor compensation.

Original languageEnglish (US)
Pages (from-to)1471-1505
Number of pages35
Issue number3
StatePublished - May 2021

Bibliographical note

Publisher Copyright:
© 2021 The Econometric Society


  • Equity premium puzzle
  • dynamic contracting
  • limited commitment
  • tail risk


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