Worker Heterogeneity and the Economic Importance of Risk and Matching: Evidence from Contractual Data and Field Experiments

We measure the importance of risk within a firm that pays its workers piece rates, exploiting data from payroll records and a series of field experiments conducted within the firm. These data are used to identify and estimate worker preferences, abilities and risk exposure. These estimates are combined to measure the workers’ cost of risk: their willingness to pay to avoid risky contracts. We find that costs of risk are, on average, small (1% of daily earnings). However, these costs are found to vary substantially across workers (reaching up to 39% of daily earnings), reflecting substantial heterogeneity in worker productivity and risk tolerance. Furthermore, we measure the potential benefits to the firm of reducing risk exposure to risk-averse agents by matching workers to work conditions. We find that matching could increase overall firm profits by up to 12%. JEL Codes: J33, M52, C93