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Human capital as a risky asset and the effect of uncertainty on the decision to invest

  • Saïd Hanchane

    ()

    (LEST - Laboratoire d'économie et de sociologie du travail - Université de la Méditerranée - Aix-Marseille 2 - Université de Provence - Aix-Marseille 1 - AMU - Aix Marseille Université - CNRS - Centre National de la Recherche Scientifique)

  • Abraham Lioui

    ()

    (Department of Economics - Bar Llan University [Israël])

  • David Touahri

    ()

    (LEST - Laboratoire d'économie et de sociologie du travail - Université de la Méditerranée - Aix-Marseille 2 - Université de Provence - Aix-Marseille 1 - AMU - Aix Marseille Université - CNRS - Centre National de la Recherche Scientifique)

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    In this paper, we analyse the human capital accumulation process over the life cycle of individuals under uncertainty. To do so, we develop a continuous time dynamic programming model which takes into account several sources of uncertainty, concerning the human capital accumulation process and the labour market. We also introduce some macro exogenous variables to take into account intertemporality of decisions. We first determine the structure of human capital investment in a general setting. Then, we specify individual preferences to obtain explicit solutions, and we produce an in-depth study of each source's effect of uncertainty on human capital investment. As a special case of state variable, we explicitely take into account unemployment risk. We show that the global effect of uncertainty is negative, except if a sufficiently high risk premium exists.

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    Date of creation: 11 Apr 2006
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    Handle: RePEc:hal:wpaper:halshs-00010139
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    1. R. C. Merton, 1970. "Optimum Consumption and Portfolio Rules in a Continuous-time Model," Working papers 58, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. 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.
    3. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, September.
    4. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    5. Jacob A. Mincer, 1974. "Introduction to "Schooling, Experience, and Earnings"," NBER Chapters, in: Schooling, Experience, and Earnings, pages 1-4 National Bureau of Economic Research, Inc.
    6. Williams, Joseph T, 1979. "Uncertainty and the Accumulation of Human Capital over the Life Cycle," The Journal of Business, University of Chicago Press, vol. 52(4), pages 521-48, October.
    7. Card, David, 2001. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," Econometrica, Econometric Society, vol. 69(5), pages 1127-60, September.
    8. Snow, Arthur & Warren, Ronald S, Jr, 1990. "Human Capital Investment and Labor Supply under Uncertainty," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(1), pages 195-206, February.
    9. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
    10. Griliches, Zvi, 1977. "Estimating the Returns to Schooling: Some Econometric Problems," Econometrica, Econometric Society, vol. 45(1), pages 1-22, January.
    11. Fan, Chengze, 1993. "Schooling as a job search process," Economics Letters, Elsevier, vol. 41(1), pages 85-91.
    12. 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.
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