Idiosyncratic risk, investment in human capital, and growth
We investigate the aggregate implications of individual specific uncertainty about returns to investment in education in the absence of insurance markets. We do so in a general equilibrium OLG model in which physical resources must be devoted to educations in order to accumulate human capital. We conclude that uncertainty with incomplete financial markets may strongly affect individual behavior but not the aggregate of the economy. Different degrees of uncertainty will induce different intensities of human to physical capital but will not have a significant impact on the long run growth rate of the economy.
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