What effect does uncertainty have on the length of labor contracts?

The literature on duration of explicit labor contracts has suggested that i ncreased uncertainty should be associated with shorter labor contracts. Mor e recently, it has been argued that the effect of uncertainty on contract d uration depends on the type of uncertainty involved. Specifically, if the u ncertainty pertains to aggregate real shocks, then contract durations shoul d increase as workers seek to insure themselves against the repercussions o f such shocks. Using a sample of 1876 labor contracts signed during the per iod 1977-1988, this paper provides an empirical test of the foregoing hypot hesis (known as the efficient risk sharing hypothesis). The paper presents results from estimation of a generalized-probit, simultaneous equation mode l, in which the dependent variables are contract length, indexation of the contract through a cost-of-living allowance and thp rate of wage change spe cified in the contract. The empirical findings confirm the efficient risk s haring hypothesis. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classification: J50: C30.