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Does risk matter for occupational choices? Experimental evidence from an African labour market

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  • Paolo Falco

Abstract

This paper investigates the role of risk-aversion in the allocation of workers between formal and informal jobs in Ghana. In the model I propose risk-averse workers can opt between the free-entry informal sector and queuing for formal occupations. Conditional on identifying the riskier option, the model yields testable implications on the relationship between risk-preferences and workers’ allocation. My testing strategy proceeds in two steps. First, I estimate expected income uncertainty through panel data and find it significantly higher in the informal sector. Second, using novel experimental data to elicit individual attitudes to risk, I estimate the direct effect of risk-aversion on occupational choices and find that, in line with the first result, more risk-averse workers are more likely to queue for formal jobs and less likely to be in the informal sector. The results bear important implications for the optimal design of employment policies and social security.

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Bibliographic Info

Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2013-15.

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Date of creation: 2013
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Handle: RePEc:csa:wpaper:2013-15

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Keywords: sector allocation; occupational choices; risk-aversion; informality;

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  1. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, Econometric Society, vol. 47(2), pages 263-91, March.
  2. Steffen Andersen & James C. Cox & Glenn W. Harrison & Morten Lau & Elisabet E. Rutstroem & Vjollca Sadiraj, 2011. "Asset Integration and Attitudes to Risk: Theory and Evidence," Working Papers, Durham University Business School 2011_10, Durham University Business School.
  3. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(2), pages 274-98, April.
  4. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198296980, October.
  5. Allan G. King, 1974. "Occupational choice, risk aversion, and wealth," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, ILR Review, Cornell University, ILR School, vol. 27(4), pages 586-596, July.
  6. Marcel Fafchamps & David McKenzie & Simon Quinn & Christopher Woodruff, 2010. "Using PDA consistency checks to increase the precision of profits and sales measurement in panels," CSAE Working Paper Series, Centre for the Study of African Economies, University of Oxford 2010-19, Centre for the Study of African Economies, University of Oxford.
  7. Bonin, Holger & Dohmen, Thomas J. & Falk, Armin & Huffman, David & Sunde, Uwe, 2007. "Cross-sectional earnings risk and occupational sorting: The role of risk attitudes," Munich Reprints in Economics, University of Munich, Department of Economics 20204, University of Munich, Department of Economics.
  8. Francis Teal & Justin Sandefur, 2010. "The Returns to Formality and Informality in Urban Africa," Economics Series Working Papers, University of Oxford, Department of Economics CSAE WPS/2010-03, University of Oxford, Department of Economics.
  9. Gary S. Becker, 1962. "Investment in Human Capital: A Theoretical Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 70, pages 9.
  10. Brown, Sarah & Dietrich, Michael & Ortiz-Nuñez, Aurora & Taylor, Karl, 2011. "Self-employment and attitudes towards risk: Timing and unobserved heterogeneity," Journal of Economic Psychology, Elsevier, Elsevier, vol. 32(3), pages 425-433, June.
  11. Fiess, Norbert M. & Fugazza, Marco & Maloney, William F., 2010. "Informal self-employment and macroeconomic fluctuations," Journal of Development Economics, Elsevier, Elsevier, vol. 91(2), pages 211-226, March.
  12. Fields, Gary S., 1975. "Rural-urban migration, urban unemployment and underemployment, and job-search activity in LDCs," Journal of Development Economics, Elsevier, Elsevier, vol. 2(2), pages 165-187, June.
  13. Leontaridi, Marianthi Rannia, 1998. " Segmented Labour Markets: Theory and Evidence," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 12(1), pages 63-101, February.
  14. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(4), pages 719-48, August.
  15. Pannenberg, Markus, 2010. "Risk attitudes and reservation wages of unemployed workers: Evidence from panel data," Economics Letters, Elsevier, Elsevier, vol. 106(3), pages 223-226, March.
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Cited by:
  1. Paolo Falco & Luke Haywood, 2013. "Entrepreneurship versus Joblessness: Explaining the Rise in Self-Employment," Discussion Papers of DIW Berlin, DIW Berlin, German Institute for Economic Research 1334, DIW Berlin, German Institute for Economic Research.

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