IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpot/0508004.html
   My bibliography  Save this paper

The Choice of Institutions: The Role of Risk and Risk-Aversion

Author

Listed:
  • Diana Weinhold

    (London School of Economics)

  • Paul J. Zak

    (Claremont Graduate University)

Abstract

Institutions can affect individual behavior both via their efficiency impact and via their risk reducing mechanisms. However there has been little study of the relative importance of these two channels in how individuals choose between simultaneously extant institutions. This paper presents a simple model of institutional choice in a labor market when there is a risk/reward trade-off, and tests the predictions of the theory. Using a novel empirical approach that adapts an ARCH-in-mean to cross-sectional survey data from China, we find that risk and risk aversion are strongly related to the choice of a labor market institution. Further, risk and risk aversion are quantitatively more important than the sectoral wage differential in explaining employment institution choices. Specifically, we find that wage risk has two orders of magnitude greater impact on labor market institutional choice than the wage difference, with a one standard deviation increase in earnings risk reducing the number of workers choosing jobs in the private (risky) sector by 22%.

Suggested Citation

  • Diana Weinhold & Paul J. Zak, 2005. "The Choice of Institutions: The Role of Risk and Risk-Aversion," Others 0508004, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpot:0508004
    Note: Type of Document - pdf; pages: 22
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/othr/papers/0508/0508004.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Christopher A. Pissarides & Barbara Petrongolo, 2001. "Looking into the Black Box: A Survey of the Matching Function," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 390-431, June.
    2. Brixiova, Zuzana & Kiyotaki, Nobuhiro, 1997. "Private sector development in transition economies," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 46(1), pages 241-279, June.
    3. Margaret Maurer-Fazio, 1995. "Labor Reform in China: Crossing the River by Feeling the Stones," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 37(4), pages 111-123, December.
    4. Ormiston, Michael B & Schlee, Edward E, 1994. "Wage Uncertainty and Competitive Equilibrium in Labour Markets," Economica, London School of Economics and Political Science, vol. 61(242), pages 137-145, May.
    5. 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 950-963, December.
    6. Hamermesh, Daniel S & Biddle, Jeff E, 1994. "Beauty and the Labor Market," American Economic Review, American Economic Association, vol. 84(5), pages 1174-1194, December.
    7. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
    8. Cheung, Steven N S, 1969. "Transaction Costs, Risk Aversion, and the Choice of Contractual Arrangements," Journal of Law and Economics, University of Chicago Press, vol. 12(1), pages 23-42, April.
    9. Chetan Ghate & Quan Vu Le & Paul J. Zak, 2003. "Optimal Fiscal Policy in an Economy Facing Sociopolitical Instability," Review of Development Economics, Wiley Blackwell, vol. 7(4), pages 583-598, November.
    10. repec:eee:labchp:v:2:y:1986:i:c:p:789-848 is not listed on IDEAS
    11. Hayashi, Fumio & Altonji, Joseph & Kotlikoff, Laurence, 1996. "Risk-Sharing between and within Families," Econometrica, Econometric Society, vol. 64(2), pages 261-294, March.
    12. Shaw, Kathryn L, 1996. "An Empirical Analysis of Risk Aversion and Income Growth," Journal of Labor Economics, University of Chicago Press, vol. 14(4), pages 626-653, October.
    13. Weiss, Yoram, 1972. "The Risk Element in Occupational and Educational Choices," Journal of Political Economy, University of Chicago Press, vol. 80(6), pages 1203-1213, Nov.-Dec..
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Michalis Drouvelis & Julian C. Jamison, 2015. "Selecting public goods institutions: Who likes to punish and reward?," Southern Economic Journal, John Wiley & Sons, vol. 82(2), pages 501-534, October.
    2. repec:wly:soecon:v:82:2:y:2015:p:501-534 is not listed on IDEAS
    3. Michalis Drouvelis & Julian C. Jamison, 2015. "Selecting public goods institutions: Who likes to punish and reward?," Southern Economic Journal, Southern Economic Association, vol. 82(2), pages 501-534, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Stacey Chen, 2003. "Does COllege Attendance Increase Wage Volatility," Discussion Papers 03-01, University at Albany, SUNY, Department of Economics.
    2. Brodaty, Thomas & Gary-Bobo, Robert J. & Prieto, Ana, 2014. "Do risk aversion and wages explain educational choices?," Journal of Public Economics, Elsevier, vol. 117(C), pages 125-148.
    3. Schweri, Juerg & Hartog, Joop & Wolter, Stefan C., 2011. "Do students expect compensation for wage risk?," Economics of Education Review, Elsevier, vol. 30(2), pages 215-227, April.
    4. Weida Kuang & Chunlin Liu & Qun Wu & Hongchao Zeng, 2021. "How do Interest Rate Changes Affect Mortgage Curtailments? Evidence from China," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(S2), pages 395-427, September.
    5. Lex Borghans & Angela Lee Duckworth & James J. Heckman & Bas ter Weel, 2008. "The Economics and Psychology of Personality Traits," Journal of Human Resources, University of Wisconsin Press, vol. 43(4).
    6. Rok Spruk & Mitja Kovac, 2018. "Inefficient Growth," Review of Economics and Institutions, Università di Perugia, vol. 9(2).
    7. Michalis Drouvelis & Julian C. Jamison, 2015. "Selecting public goods institutions: Who likes to punish and reward?," Southern Economic Journal, John Wiley & Sons, vol. 82(2), pages 501-534, October.
    8. James Kai-sing Kung, 2022. "On the Origins and Persistent Effects of the World’s First Meritocratic Institution," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 64(4), pages 563-581, December.
    9. Caliendo, Marco & Cobb-Clark, Deborah A. & Obst, Cosima & Uhlendorff, Arne, 2023. "Risk preferences and training investments," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 668-686.
    10. Wölfel, Oliver & Heineck, Guido, 2012. "Parental risk attitudes and children's secondary school track choice," Economics of Education Review, Elsevier, vol. 31(5), pages 727-743.
    11. Christiansen, Charlotte & Nielsen, Helena Skyt, 2002. "The Educational Asset Market: A Finance Perspective on Human Capital Investment," Working Papers 02-10, University of Aarhus, Aarhus School of Business, Department of Economics.
    12. Luis Diaz‐Serrano & Joop Hartog & Helena Skyt Nielsen, 2008. "Compensating Wage Differentials for Schooling Risk in Denmark," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(4), pages 711-731, December.
    13. Christian Belzil & Marco Leonardi, 2013. "Risk Aversion and Schooling Decisions," Annals of Economics and Statistics, GENES, issue 111-112, pages 35-70.
    14. Falch, Torberg & Justina, Fischer, 2016. "Welfare state generosity and student performance: Evidence from international student tests 1980-2003," MPRA Paper 74553, University Library of Munich, Germany.
    15. Cheng Yuan & Xiaoxiao Wang & Li Lin, 2023. "Why Do Financially Illiterate Students Perceive Lower Education Returns? Evidence From a Survey in Rural China," SAGE Open, , vol. 13(2), pages 21582440231, June.
    16. repec:wly:soecon:v:82:2:y:2015:p:501-534 is not listed on IDEAS
    17. Stacey Chen, 2001. "Is Investing in College Education Risky?," Discussion Papers 01-09, University at Albany, SUNY, Department of Economics.
    18. Daniel Pollmann & Thomas Dohmen & Franz Palm, 2020. "Robust Estimation of Wage Dispersion with Censored Data: An Application to Occupational Earnings Risk and Risk Attitudes," De Economist, Springer, vol. 168(4), pages 519-540, December.
    19. C. Osiander & M. Dietz, 2016. "Determinanten der Weiterbildungsbereitschaft: Ergebnisse eines faktoriellen Surveys unter Arbeitslosen [What determines the motivation for further training? Results from a factorial survey among jo," Journal for Labour Market Research, Springer;Institute for Employment Research/ Institut für Arbeitsmarkt- und Berufsforschung (IAB), vol. 49(1), pages 59-76, July.
    20. Huebener, Mathias, 2015. "The role of paternal risk attitudes in long-run education outcomes and intergenerational mobility," Economics of Education Review, Elsevier, vol. 47(C), pages 64-79.
    21. James Ang & Rebel Cole & Daniel Lawson, 2010. "The Role of Owner in Capital Structure Decisions: An Analysis of Single-Owner Corporations," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 14(3), pages 1-36, Fall.

    More about this item

    Keywords

    Institutions; Risk; Labor Market; Risk Aversion;
    All these keywords.

    JEL classification:

    • P3 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J40 - Labor and Demographic Economics - - Particular Labor Markets - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpot:0508004. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: EconWPA (email available below). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.