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Earnings Dispersion, Risk Aversion and Education

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  • Christian Belzil

    ()
    (GATE CNRS)

  • Jörgen Hansen

Abstract

We estimate a dynamic programming model of schooling decisions in which the degree of risk aversion can be inferred from schooling decisions. In our model, individuals are heterogeneous with respect to school and market abilities but homogeneous with respect to the degree of risk aversion. We allow endogenous schooling attainments to affect the level of risk experienced in labor market earnings through wage dispersion and employment rate dispersion. We find a low degree of relative risk aversion (0.93) and the estimates indicate that both wage and employment rate dispersions decrease significantly with schooling attainments. We find that a counterfactual increase in risk aversion will increase schooling attainments. Finally, the low degree of risk aversion implies that an increase in earnings dispersion would have little effect on schooling attainments.

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File URL: ftp://ftp.gate.cnrs.fr/RePEc/2004/0406.pdf
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Bibliographic Info

Paper provided by Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure in its series Working Papers with number 0406.

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Length: 29 pages
Date of creation: Jan 2004
Date of revision:
Handle: RePEc:gat:wpaper:0406

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Keywords: Dynamic Programming; Returns to Education; Risk Aversion; Human Capital; Earnings Dispersion;

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  1. Kodde, David A, 1986. "Uncertainty and the Demand for Education," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 460-67, August.
  2. Eckstein, Zvi & Wolpin, Kenneth, 1998. "Youth Employment and Academic Performance in High School," CEPR Discussion Papers 1861, C.E.P.R. Discussion Papers.
  3. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, vol. 75, pages 352.
  4. Kocherlakota, N., 1995. "The Equity Premium: It's Still a Puzzle," Working Papers 95-05, University of Iowa, Department of Economics.
  5. Johnson, Thomas, 1978. "Time in School: The Case of the Prudent Patron," American Economic Review, American Economic Association, vol. 68(5), pages 862-72, December.
  6. Christian Belzil & J�rgen Hansen, 2002. "Unobserved Ability and the Return to Schooling," Econometrica, Econometric Society, vol. 70(5), pages 2075-2091, September.
  7. repec:att:wimass:9429 is not listed on IDEAS
  8. Keane, Michael P & Wolpin, Kenneth I, 2001. "The Effect of Parental Transfers and Borrowing Constraints on Educational Attainment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1051-1103, November.
  9. Michael P. Keane & Kenneth I. Wolpin, 1995. "The career decisions of young men," Working Papers 559, Federal Reserve Bank of Minneapolis.
  10. Christian Belzil & Jörgen Hansen, 2004. "A Structural Analysis of the Correlated Random Coefficient Wage Regression Model," Working Papers 0405, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  11. John Rust & Department of Economics & University of Wisconsin, 1994. "Using Randomization to Break the Curse of Dimensionality," Computational Economics 9403001, EconWPA, revised 04 Jul 1994.
  12. Robert M. Sauer, 2004. "Educational Financing and Lifetime Earnings," Review of Economic Studies, Wiley Blackwell, vol. 71(4), pages 1189-1216, October.
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  14. Olson, Lawrence & White, Halbert & Shefrin, H M, 1979. "Optimal Investment in Schooling when Incomes are Risky," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 522-39, June.
  15. Rosen, Sherwin, 1985. "Implicit Contracts: A Survey," Journal of Economic Literature, American Economic Association, vol. 23(3), pages 1144-75, September.
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  17. Kenneth I. Wolpin & Mark R. Rosenzweig, 2000. "Natural "Natural Experiments" in Economics," Journal of Economic Literature, American Economic Association, vol. 38(4), pages 827-874, December.
  18. Levhari, David & Weiss, Yoram, 1974. "The Effect of Risk on the Investment in Human Capital," American Economic Review, American Economic Association, vol. 64(6), pages 950-63, December.
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  20. Stephen V. Cameron & James J. Heckman, 1998. "Life Cycle Schooling and Dynamic Selection Bias: Models and Evidence for Five Cohorts of American Males," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 262-333, April.
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