ON THE CYCLICAL ALLOCATION OF RISK

A real business cycle model, with two types of agents, workers, and en trepreneurs, is simulated to see if it can account for some stylized f acts characterizing postwar U.S. business cycle fluctuations, such as the countercyclical movement of labor's share of income and the acycli cal behavior of real wages. It can. There exists an economy-wide marke t for contingent claims. On this market workers purchase insurance fro m entrepreneurs, through optimal labor contracts, against losses in in come due to business cycle fluctuations. Insurance flows protecting wo rkers against aggregate cyclical risk are calculated to be less than o ne percent of labor income.