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A Bound on Risk Aversion Using Labor Supply Elasticities

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Raj Chetty

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Abstract

This paper shows that existing evidence on labor supply behavior places an upper bound on risk aversion in the expected utility model. I derive a formula for the coefficient of relative risk aversion (g) in terms of (1) the ratio of the income elasticity of labor supply to the wage elasticity and (2) the degree of complementarity between consumption and labor. I bound the degree of complementarity using data on consumption choices when labor supply varies randomly across states. Using labor supply elasticity estimates from thirty-three studies, I find a mean estimate of g = 1. I then show that generating g > 2 would require that wage increases cause sharper reductions in labor supply than estimated in any of the studies.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12067.

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Date of creation: Mar 2006
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Handle: RePEc:nbr:nberwo:12067

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Find related papers by JEL classification:
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
J60 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - General

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  1. Yuriy Gorodnichenko & Klara Sabirianova Peter, 2006. "Public Sector Pay and Corruption: Measuring Bribery from Micro Data," IZA Discussion Papers 1987, Institute for the Study of Labor (IZA). [Downloadable!]
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  2. John Whalley & Ximing Yue, 2006. "Rural Income Volatility and Inequality in China," NBER Working Papers 12779, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Louis Kaplow, 2006. "Optimal Control of Externalities in the Presence of Income Taxation," NBER Working Papers 12339, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Louis Kaplow, 2006. "Myopia and the Effects of Social Security and Capital Taxation on Labor Supply," NBER Working Papers 12452, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Richard Layard & Guy Mayraz & Stephen J. Nickell, 2007. "The Marginal Utility of Income," SOEPpapers 50, DIW Berlin, The German Socio-Economic Panel (SOEP). [Downloadable!]
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