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Risk Aversion and Schooling Decisions

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  • Belzil, Christian

    ()
    (Ecole Polytechnique, Paris)

  • Leonardi, Marco

    ()
    (University of Milan)

Abstract

We develop a non-rational expectation econometric model of sequential schooling decisions. Using unique Italian panel data in which individual differences in attitudes toward risk are measurable (with error), we investigate the effect of risk aversion on the probability of entering higher education. This allows us to characterize the subjective (as opposed to the objective) effect of higher education on marginal risk exposure. Because the measure of risk aversion (the classical Arrow-Pratt degree of absolute risk aversion) is posterior to schooling decisions, it depends on current wealth realizations and we must therefore take into account its endogeneity. We also allow risk aversion to be measured with error. After taking into account both the endogeneity of wealth and measurement error, we find that risk aversion is a key determinant (comparable to parents’ educational background) of the decisions to enter higher education. Precisely, risk aversion acts as a deterrent to higher education investment.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2994.

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Length: 42 pages
Date of creation: Aug 2007
Date of revision:
Publication status: forthcoming in: Annals of Economics and Statistics
Handle: RePEc:iza:izadps:dp2994

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Keywords: subjective beliefs; schooling; ex-ante risk; risk aversion; dynamic discrete choices;

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References

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Citations

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Cited by:
  1. Schweri, Jürg & Hartog, Joop & Wolter, Stefan C., 2009. "Do Students Expect Compensation for Wage Risk?," IZA Discussion Papers 4069, Institute for the Study of Labor (IZA).
  2. Bilkic, N. & Gries, T. & Pilichowski, M., 2012. "Stay in school or start working? — The human capital investment decision under uncertainty and irreversibility," Labour Economics, Elsevier, Elsevier, vol. 19(5), pages 706-717.
  3. Belzil, Christian, 2007. "Subjective Beliefs and Schooling Decisions," IZA Discussion Papers 2820, Institute for the Study of Labor (IZA).
  4. Dasgupta, Utteeyo & Gangadharan, Lata & Maitra, Pushkar & Mani, Subha & Subramanian, Samyukta, 2011. "Selection into skill accumulation: evidence using observational and experimental data," MPRA Paper 32383, University Library of Munich, Germany.
  5. Mazza, Jacopo & van Ophem, Hans & Hartog, Joop, 2013. "Unobserved heterogeneity and risk in wage variance: Does more schooling reduce earnings risk?," Labour Economics, Elsevier, Elsevier, vol. 24(C), pages 323-338.
  6. Paolo Buonanno & Dario Pozzoli, 2007. "Risk Aversion and College Subject," Working Papers, University of Bergamo, Department of Economics 0707, University of Bergamo, Department of Economics.
  7. Fabian T. Pfeffer & Martin Hällsten, 2012. "Mobility Regimes and Parental Wealth: The United States, Germany, and Sweden in Comparison," SOEPpapers on Multidisciplinary Panel Data Research 500, DIW Berlin, The German Socio-Economic Panel (SOEP).

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