The insurance role of the firm

We review the recent literature on the risk-sharing role of the firm. We provide a framework for studying risk sharing between workers and firm owners vis-a-vis firm's specific shocks of different nature. We show how this framework can be taken to the data to provide estimates of the extent of insurance within the firm. Estimates from a large number of Western countries strongly support the view that in capitalist economies the firm is a large albeit far from complete wage insurance instrument. We quantify the welfare benefits of firm-provided wage insurance, show evidence on how workers react to firm's shocks passed through wages, and discuss the future role of the firm as a wage insurance provider.