Multidimensional heterogeneity and the economic importance of risk and matching: evidence from contractual data and field experiments

Authors


  • We thank seminar participants at Southampton, the Canadian Econometric Study Group in Ottawa, and the Conference on Experiments in Organizations at Erasmus University in Rotterdam in October 2009. We acknowledge research support from the Social Sciences and Humanities Research Council of Canada (SSHRC) and the Fonds Québecois de Recherche en Societé et Culture (FQRSC).

Abstract

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.

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