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Risk Aversion and Schooling Decisions

  • Christian Belzil

    ()

    (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)

  • Marco Leonardi

    (IZA - Institute for the study of labor - IZA - Institute for the Study of Labor, Università degli studi di Milano - Università di Milano - Università degli studi di Milano)

We develop a non-rational expectation econometric model of sequential schooling decisions. Using unique Italian panel data in which individual differences in attitudes toward risk are measurable (with error), we investigate the effect of risk aversion on the probability of entering higher education. This allows us to characterize the subjective (as opposed to the objective) effect of higher education on marginal risk exposure. Because the measure of risk aversion (the classical Arrow-Pratt degree of absolute risk aversion) is posterior to schooling decisions, it depends on current wealth realizations and we must therefore take into account its endogeneity. We also allow risk aversion to be measured with error. After taking into account both the endogeneity of wealth and measurement error, we find that risk aversion is a key determinant (comparable to parents' educational background) of the decisions to enter higher education. Precisely, risk aversion acts as a deterrent to higher education investment

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Paper provided by HAL in its series Post-Print with number halshs-00174507.

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Date of creation: Jul 2007
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Handle: RePEc:hal:journl:halshs-00174507
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  1. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, June.
  2. Joop Hartog & Hans van Ophem & Simona Maria Bajdechi, 2004. "How Risky is Investment in Human Capital?," Tinbergen Institute Discussion Papers 04-080/3, Tinbergen Institute.
  3. Matthew Rabin, 2001. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Method and Hist of Econ Thought 0012001, EconWPA.
  4. Joop Hartog & Hans van Ophem & Simona Maria Bajdechi, 2004. "How Risky is Investment in Human Capital?," Tinbergen Institute Discussion Papers 04-080/3, Tinbergen Institute.
  5. Belzil, Christian, 2006. "The Return to Schooling in Structural Dynamic Models: A Survey," IZA Discussion Papers 2370, Institute for the Study of Labor (IZA).
  6. Christian Belzil & J�rgen Hansen, 2002. "Unobserved Ability and the Return to Schooling," Econometrica, Econometric Society, vol. 70(5), pages 2075-2091, September.
  7. Pierre Cahuc & André Zylberberg, 2004. "Labor Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 026203316x, June.
  8. Belzil, Christian & Leonardi, Marco, 2006. "Can Risk Aversion Explain Schooling Attainments? Evidence from Italy," IZA Discussion Papers 2123, Institute for the Study of Labor (IZA).
  9. Ignacio Palacios-Huerta, 2001. "An Empirical Analysis of the Risk Properties of Human Capital Returns," Working Papers 2001-10, Brown University, Department of Economics.
  10. Stacey H. Chen, 2008. "Estimating the Variance of Wages in the Presence of Selection and Unobserved Heterogeneity," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 275-289, May.
  11. Michael P. Keane & Kenneth I. Wolpin, 1995. "The career decisions of young men," Working Papers 559, Federal Reserve Bank of Minneapolis.
  12. Luigi Guiso & Monica Paiella, 2003. "Risk Aversion, Wealth and Background Risk," Temi di discussione (Economic working papers) 483, Bank of Italy, Economic Research and International Relations Area.
  13. Heckman, James J. & Navarro, Salvador, 2005. "Dynamic Discrete Choice and Dynamic Treatment Effects," IZA Discussion Papers 1790, Institute for the Study of Labor (IZA).
  14. John F. Geweke & Michael P. Keane, 1996. "Bayesian inference for dynamic choice models without the need for dynamic programming," Working Papers 564, Federal Reserve Bank of Minneapolis.
  15. Flavio Cunha & James Heckman & Salvador Navarro, 2005. "Separating uncertainty from heterogeneity in life cycle earnings," Oxford Economic Papers, Oxford University Press, vol. 57(2), pages 191-261, April.
  16. 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.
  17. Michael P. Keane, 2002. "Financial Aid, Borrowing Constraints, and College Attendance: Evidence from Structural Estimates," American Economic Review, American Economic Association, vol. 92(2), pages 293-297, May.
  18. Christian Belzil, 2007. "Subjective Beliefs and Schooling Decisions," Working Papers 0717, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  19. Matthew Johnson & Michael P. Keane, 2013. "A Dynamic Equilibrium Model of the US Wage Structure, 1968–1996," Journal of Labor Economics, University of Chicago Press, vol. 31(1), pages 1 - 49.
  20. Stephen V. Cameron & Christopher Taber, 2004. "Estimation of Educational Borrowing Constraints Using Returns to Schooling," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 132-182, February.
  21. David Card & Thomas Lemieux, 2000. "Dropout and Enrollment Trends in the Post-War Period: What Went Wrong in the 1970s?," NBER Working Papers 7658, National Bureau of Economic Research, Inc.
  22. Guiso, Luigi & Jappelli, Tullio & Pistaferri, Luigi, 2002. "An Empirical Analysis of Earnings and Employment Risk," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 241-53, April.
  23. Monica Paiella & Luigi Guiso, 2004. "The Role of Risk Aversion in Predicting Individual Behaviour," Econometric Society 2004 Latin American Meetings 222, Econometric Society.
  24. 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.
  25. 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.
  26. 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.
  27. Joop Hartog & Hans van Ophem & Simona Maria Bajdechi, 2004. "How Risky is Investment in Human Capital?," CESifo Working Paper Series 1261, CESifo Group Munich.
  28. Chiswick, Barry R & Mincer, Jacob, 1972. "Time-Series Changes in Personal Income Inequality in the United States from 1939, with Projections to 1985," Journal of Political Economy, University of Chicago Press, vol. 80(3), pages S34-S66, Part II, .
  29. Thomas Lemieux, 2006. "Increasing Residual Wage Inequality: Composition Effects, Noisy Data, or Rising Demand for Skill?," American Economic Review, American Economic Association, vol. 96(3), pages 461-498, June.
  30. Marco Leonardi, 2007. "Do Parents Risk Aversion and Wealth Explalin Secondary School Choice?," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 66(2), pages 177-206, July.
  31. 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 626-53, October.
  32. Stephen V. Cameron & James J. Heckman, 1998. "Life Cycle Schooling and Dynamic Selection Bias: Models and Evidence for Five Cohorts," NBER Working Papers 6385, National Bureau of Economic Research, Inc.
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