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Earnings Dispersion, Risk Aversion and Education

  • Christian Belzil
  • Jörgen Hansen

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. Nous estimons un modèle de programmation dynamique des choix d'éducation dans lequel le degré d'aversion au risque peut être estimé à partir des choix de scolarisation. Dans notre modèle, les individus sont hétérogènes quant à leurs capacités scolaires et aptitudes sur le marché de l'emploi, mais homogènes en ce qui concerne le degré d'aversion au risque. Nous laissons les niveaux scolaires endogènes influencer le niveau de risque concernant les revenus d'emploi, et ce, à travers la dispersion des salaires et la dispersion du taux d'emploi. Nous trouvons un faible degré d'aversion relative au risque (0,9282) et nos résultats indiquent que les taux de dispersion, aussi bien pour le salaire que pour le taux d'emploi, diminuent de façon significative avec le niveau de scolarisation. Nous trouvons qu'une augmentation contrefactuelle de l'aversion au risque va faire augmenter le niveau de scolarité atteint. Finalement, un niveau faible d'aversion au risque implique qu'une augmentation de la dispersion des revenus aurait peu d'impact sur le niveau de scolarisation.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2002s-20.

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Length: 28 pages
Date of creation: 01 Feb 2002
Date of revision:
Handle: RePEc:cir:cirwor:2002s-20
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  1. Keane, Michael P & Wolpin, Kenneth I, 1997. "The Career Decisions of Young Men," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 473-522, June.
  2. Christian Belzil & Jörgen Hansen, 2004. "A Structural Analysis of the Correlated Random Coefficient Wage Regression Model," Working Papers 0405, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  3. Stephen V. Cameron & James J. Heckman, 1998. "Life Cycle Schooling and Dynamic Selection Bias: Models and Evidence for Five Cohorts of American Males," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 262-333, April.
  4. Thierry Magnac & David Thesmar, 2002. "Identifying Dynamic Discrete Decision Processes," Econometrica, Econometric Society, vol. 70(2), pages 801-816, March.
  5. 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, vol. 42(4), pages 1051-1103, November.
  6. John Rust & Department of Economics & University of Wisconsin, 1994. "Using Randomization to Break the Curse of Dimensionality," Computational Economics 9403001, EconWPA, revised 04 Jul 1994.
  7. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, vol. 75, pages 352.
  8. Rust, John, 1987. "Optimal Replacement of GMC Bus Engines: An Empirical Model of Harold Zurcher," Econometrica, Econometric Society, vol. 55(5), pages 999-1033, September.
  9. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March.
  10. Christian Belzil & Jörgen Hansen, 2002. "Unobserved Ability and the Return to Schooling," CIRANO Working Papers 2002s-19, CIRANO.
  11. Eckstein, Zvi & Wolpin, Kenneth, 1998. "Youth Employment and Academic Performance in High School," IZA Discussion Papers 18, Institute for the Study of Labor (IZA).
  12. Sherwin Rosen, 1985. "Implicit Contracts: A Survey," NBER Working Papers 1635, National Bureau of Economic Research, Inc.
  13. Johnson, Thomas, 1978. "Time in School: The Case of the Prudent Patron," American Economic Review, American Economic Association, vol. 68(5), pages 862-72, December.
  14. Robert Sauer, 2002. "Educational Financing and Lifetime Earnings," Working Papers 2002-06, Brown University, Department of Economics.
  15. 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 950-63, December.
  16. Kodde, David A, 1986. "Uncertainty and the Demand for Education," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 460-67, August.
  17. Zvi Eckstein & Kenneth I. Wolpin, 1999. "Why Youths Drop Out of High School: The Impact of Preferences, Opportunities, and Abilities," Econometrica, Econometric Society, vol. 67(6), pages 1295-1340, November.
  18. Kenneth I. Wolpin & Mark R. Rosenzweig, 2000. "Natural "Natural Experiments" in Economics," Journal of Economic Literature, American Economic Association, vol. 38(4), pages 827-874, December.
  19. 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.
  20. Olson, Lawrence & White, Halbert & Shefrin, H M, 1979. "Optimal Investment in Schooling when Incomes are Risky," Journal of Political Economy, University of Chicago Press, vol. 87(3), pages 522-39, June.
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