General Equilibrium in a Labor-Managed Economy with
Uncertainty and Incomplete Markets

Richard E. Kihlstrom

and

Jean-Jacques Laffont

This paper studies the free entry competitive equilibria of a labor managed
economy when there are less than complete contingent claims markets. First, we prove the existence of a simple labor management equilibrium which is inefficient in the Diamond sense. Second, we introduce an insurance system internal to the firm and show that the resulting equilibrium exists and is Diamond efficient. This insurance system plays for a labor managed economy the same role as fixed obligation debt markets in an entrepreneurial stock market equilibrium.