Who Bears Firm Risk? Firm Uncertainty, Employment Contract Choice, and Differential Risk Sharing Job Market Paper

Abstract: This paper studies how firm uncertainty shapes the choice between permanent and temporary contracts, the allocation of risk between firms and workers, and the design of employment protection. Using French administrative data, I document that temporary workers are doubly exposed to firm risk. They are more likely to work at firms facing greater uncertainty, and their wage growth and separations respond 2.4 and 4 times as strongly to firm productivity shocks as those of permanent workers. I develop and structurally estimate a dynamic search model with firm competition and risk-sharing contracts under two-sided limited commitment. Firing costs act as a commitment device, allowing permanent contracts to provide greater insurance but making retention and separation costly after adverse shocks. Temporary contracts offer less insurance but allow costless separation. In the estimated model, greater firm uncertainty favors temporary contracts, and higher worker skill favors permanent ones. I   quantify how firm uncertainty shapes the macroeconomic and welfare effects of reducing employment protection. Removing firing costs on permanent contracts generates opposite responses across firms: employment and output rise at stable firms and fall at uncertain ones. Worker welfare falls and firm values rise, with both effects largest at the most uncertain firms.

Presentations: Minnesota-Wisconsin International/Macro Workshop, Midwest Macro, University of Bern, Deutsche Bundesbank, Leibniz Institute for Financial Research SAFE, Halle Institute for Economic Research, Institute for employment research IAB (scheduled), EWMES 2026 (scheduled)

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