We analyze how firms deal with economic risk by sharing the risk with creditors and workers. Recent research has demonstrated that firms insure their workers against idiosyncratic (firm-specific) shocks. We analyze workers' and creditors' exposure to local demand shocks that affect all firms in a specific industry/region. Workers' exposure to such shocks varies at the worker-, firm-, and industry-level. At the worker-level, exposure varies in human capital. At the firm-level, exposure varies across firms with different financial structures and, thus, different policies for sharing risk with creditors, as an alternative to risk-sharing with workers. At the industry-level, the different stakeholders' exposure depends on the distribution of firms' policy choices which is determined in equilibrium along with the distribution of workers' investments into human capital.
This sub-project about intra-firm risk-sharing is at the interface of projects about firm-level risk management (project A13 “Corporate Speculation with Derivatives”), and projects about effects of economic risk on workers: the projects in the molecule “The Incidence of Local Shocks” and project C7 “Labor Markets, Technology and Macroeconomic Risk” about effects of workers' risk exposure on their investments into human capital. The proposed empirical analysis is related to project C11 “Weather Risk Management“ because we use data about entrepreneurial firms in an industry subject to weather-induced demand shocks: hotel businesses in Austrian ski resorts.