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Earnings Dispersion, Risk Aversion and Education

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  • Belzil, Christian

    ()
    (Ecole Polytechnique, Paris)

  • Hansen, Jörgen

    ()
    (Concordia University)

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 (0.9282) 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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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 513.

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Length: 27 pages
Date of creation: Jun 2002
Date of revision:
Publication status: published in: Research in Labor Economics, 2004, 23, 335-358
Handle: RePEc:iza:izadps:dp513

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Keywords: human capital; risk Aversion; returns to education; dynamic programming; earnings dispersion;

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  1. Eckstein, Zvi & Wolpin, Kenneth, 1998. "Youth Employment and Academic Performance in High School," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1861, C.E.P.R. Discussion Papers.
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  3. Robert M. Sauer, 2004. "Educational Financing and Lifetime Earnings," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 71(4), pages 1189-1216, October.
  4. James Heckman & Edward Vytlacil, 1998. "Instrumental Variables Methods for the Correlated Random Coefficient Model: Estimating the Average Rate of Return to Schooling When the Return is Correlated with Schooling," Journal of Human Resources, University of Wisconsin Press, vol. 33(4), pages 974-987.
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  17. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1051-1103, November.
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