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Human Capital as an Asset Class: Implications from a General Equilibrium Model

  • Miguel Palacios


    (Owen Graduate School of Management, Vanderbilt University)

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    This paper derives the value and the risk of aggregate human capital in a dynamic equilibrium production model with Duffie-Epstein preferences. In this setting the expected return of a risky asset is a function of the asset's covariance with consumption growth and a weighted average of the asset's covariance with aggregate wage growth and aggregate financial returns. A calibration of the model matching the historical ratio of wages to consumption in the United States (85% between 1950 and 2007) suggests that the weight of human capital in aggregate wealth is 87%. The results of the calibration follow from the relative size of wages and dividends in the economy and the dynamics of the ratio of wages to consumption, which are counter-cyclical. As a result, human capital is less risky than equity, implying that the risk premium of human capital is lower than that of equity.

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    Paper provided by Human Capital and Economic Opportunity Working Group in its series Working Papers with number 2011-016.

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    Date of creation: Nov 2010
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    Handle: RePEc:hka:wpaper:2011-016
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