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Human capital risk in life-cycle economies

  • Singh, Aarti

The aggregate effects of market incompleteness are studied in a model where agents face idiosyncratic, uninsurable human capital investment risk. Using a life-cycle model with a version of a Ben-Porath (1967) human capital accumulation technology, stationary equilibria of calibrated cases are analyzed in which risk arises from specialization risk and career risk. With career risk only, stationary equilibria resemble those studied by Aiyagari (1994), and the impact of uninsurable idiosyncratic risk is relatively small. With a significant amount of specialization risk, however, stationary equilibria are severely distorted, with human capital about 57 percent as large as its complete markets counterpart.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 57 (2010)
Issue (Month): 6 (September)
Pages: 729-738

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Handle: RePEc:eee:moneco:v:57:y:2010:i:6:p:729-738
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