Human capital as a risky asset and the effect of uncertainty on the decision to invest
AbstractIn this paper, we analyse the human capital accumulation process over the life cycle of individuals under uncertainty. To do so, we develop a continuous time dynamic programming model which takes into account several sources of uncertainty, concerning the human capital accumulation process and the labour market. We also introduce some macro exogenous variables to take into account intertemporality of decisions. We first determine the structure of human capital investment in a general setting. Then, we specify individual preferences to obtain explicit solutions, and we produce an in-depth study of each source's effect of uncertainty on human capital investment. As a special case of state variable, we explicitely take into account unemployment risk. We show that the global effect of uncertainty is negative, except if a sufficiently high risk premium exists.
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Date of creation: Apr 2006
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human capital; life cycle; risk; stochastic optimal control;
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