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Does risk matter for occupational choices? Experimental evidence from an African labour market

  • Paolo Falco

This paper investigates the role of risk-aversion in the allocation of workers between formal and informal jobs in Ghana. In the model I propose risk-averse workers can opt between the free-entry informal sector and queuing for formal occupations. Conditional on identifying the riskier option, the model yields testable implications on the relationship between risk-preferences and workers’ allocation. My testing strategy proceeds in two steps. First, I estimate expected income uncertainty through panel data and find it significantly higher in the informal sector. Second, using novel experimental data to elicit individual attitudes to risk, I estimate the direct effect of risk-aversion on occupational choices and find that, in line with the first result, more risk-averse workers are more likely to queue for formal jobs and less likely to be in the informal sector. The results bear important implications for the optimal design of employment policies and social security.

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Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2013-15.

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Date of creation: 2013
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Handle: RePEc:csa:wpaper:2013-15
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  1. Suresh de Mel & David McKenzie & Christopher Woodruff, 2008. "Returns to Capital in Microenterprises: Evidence from a Field Experiment," The Quarterly Journal of Economics, MIT Press, vol. 123(4), pages 1329-1372, November.
  2. Fiess, Norbert M. & Fugazza, Marco & Maloney, William F., 2010. "Informal self-employment and macroeconomic fluctuations," Journal of Development Economics, Elsevier, vol. 91(2), pages 211-226, March.
  3. Falco, Paolo & Kerr, Andrew & Rankin, Neil & Sandefur, Justin & Teal, Francis, 2011. "The returns to formality and informality in urban Africa," Labour Economics, Elsevier, vol. 18(S1), pages S23-S31.
  4. Leontaridi, Marianthi Rannia, 1998. " Segmented Labour Markets: Theory and Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 12(1), pages 63-101, February.
  5. Fafchamps, Marcel & McKenzie, David & Quinn, Simon & Woodruff, Christopher, 2012. "Using PDA consistency checks to increase the precision of profits and sales measurement in panels," Journal of Development Economics, Elsevier, vol. 98(1), pages 51-57.
  6. Fields, Gary S., 1975. "Rural-urban migration, urban unemployment and underemployment, and job-search activity in LDCs," Journal of Development Economics, Elsevier, vol. 2(2), pages 165-187, June.
  7. Bonin, Holger & Dohmen, Thomas & Falk, Armin & Huffman, David B. & Sunde, Uwe, 2006. "Cross-sectional Earnings Risk and Occupational Sorting: The Role of Risk Attitudes," IZA Discussion Papers 1930, Institute for the Study of Labor (IZA).
  8. Stefan Dercon, 1996. "Wealth, risk and activity choices: cattle in Western Tanzania," CSAE Working Paper Series 1996-08, Centre for the Study of African Economies, University of Oxford.
  9. Brown, Sarah & Dietrich, Michael & Ortiz-Nuñez, Aurora & Taylor, Karl, 2011. "Self-employment and attitudes towards risk: Timing and unobserved heterogeneity," Journal of Economic Psychology, Elsevier, vol. 32(3), pages 425-433, June.
  10. Kihlstrom, Richard E & Laffont, Jean-Jacques, 1979. "A General Equilibrium Entrepreneurial Theory of Firm Formation Based on Risk Aversion," Journal of Political Economy, University of Chicago Press, vol. 87(4), pages 719-48, August.
  11. Gary S. Becker, 1962. "Investment in Human Capital: A Theoretical Analysis," Journal of Political Economy, University of Chicago Press, vol. 70, pages 9.
  12. Steffen Andersen & James C. Cox & Glenn W. Harrison & Morten Lau & E. Elisabet Rutström & Vjollca Sadiraj, 2012. "Asset Integration and Attitudes to Risk: Theory and Evidence," Experimental Economics Center Working Paper Series 2012-12, Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University.
  13. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  14. Pannenberg, Markus, 2010. "Risk attitudes and reservation wages of unemployed workers: Evidence from panel data," Economics Letters, Elsevier, vol. 106(3), pages 223-226, March.
  15. Allan G. King, 1974. "Occupational choice, risk aversion, and wealth," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 27(4), pages 586-596, July.
  16. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  17. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, number 9780198296980, March.
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