TY  - JOUR
AU  - Campbell,Jeffrey R.
AU  - D.M.Fisher,Jonas
TI  - Idiosyncratic Risk and Aggregate Employment Dynamics
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7936
PY  - 2000
Y2  - October 2000
UR  - http://www.nber.org/papers/w7936
L1  - http://www.nber.org/papers/w7936.pdf
N1  - Author contact info:
Jeffrey R. Campbell
Senior Economist
Economic Research Department
Federal Reserve Bank of Chicago
230 South LaSalle Street
Chicago, IL 60604-1413
Tel: 312/322-6156
Fax: 312/322-2357
E-Mail: jcampbell@frbchi.org

Jonas Fisher
Economic Research Department
Federal Reserve Bank of Chicago
230 South LaSalle Street
Chicago, IL  60604
Tel: 312/312-8177
Fax: NA
E-Mail: jfisher@frbchi.org
AB  - This paper studies how producers' idiosyncratic risks affect an industry's aggregate dynamics in an environment where certainty equivalence fails.  In the model, producers can place workers in two types of jobs, organized and temporary.  Workers are less productive in temporary jobs, but creating an organized job requires an irreversible investment of managerial resources. Increasing productivity risk raises the value of an unexercised option to create an organized job.  Losing this option is one cost of immediate organized job creation, so an increase in its value induces substitution towards cheaper temporary jobs. Because they are costless to create and destroy, a producer using temporary jobs can be more flexible, responding more to both idiosyncratic and aggregate shocks.  If all of an industry's producers adapt to heightened idiosyncratic risk in this way, the industry as a whole can respond more to a given aggregate shock. This insight is used to better understand the observation from the U.S. manufacturing sector that groups of plants displaying high idiosyncratic variability also have large aggregate fluctuations.
ER  -