Insurance and Information: Firms as a Commitment Device

We explore the role of firms in insuring non-verifiable output. As a device that allows workers to commit to the delivery of their output, the firm arises endogenously as an alternative to the market if workers are sufficiently risk averse and the firm can base its incentive payments on good information. Competition, however, may allow the market and explicit contracts to crowd out implicit insurance, even though the latter yields higher welfare. Integrating the principal-agent and shirking models, we explain why different contracting modes coexist in quite homogeneous industries. <BR><BR>