Asset Pricing with Endogenously Uninsurable Tail Risks

This paper studies asset pricing in a setting where idiosyncratic risks in labor productivities are uninsurable due to limited commitment. Firms provide insurance to workers using long-term contracts but neither side can commit to these relationships. Under the optimal contract, sufficiently adverse shocks to worker productivity are uninsured. In general equilibrium, exposure to down-side tail risks results in higher risk premia, more volatile returns and variation of returns across firms. The risk sharing patterns are also consistent with the observed cross-sectional heterogeneity in earnings and wealth sensitivities to aggregate shocks.