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Risk Aversion and Reservation Wages

  • Pannenberg, Markus

    ()

    (Bielefeld University of Applied Sciences)

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    This study examines the relationship between individual risk aversion and reservation wages using a novel set of direct measures of individual risk attitudes from the German Socio-Economic Panel (SOEP). We find that risk aversion has a significantly negative impact on the level of reservation wages. Moreover, we show that the elasticity of the reservation wage with respect to unemployment benefits is remarkably lower for risk-averse job seekers than for risk-loving job seekers. The results are consistent with an interpretation that risk-averse job seekers set their reservation wage levels sufficiently low, so that they accept almost every job offer.

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    File URL: http://ftp.iza.org/dp2806.pdf
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    Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2806.

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    Length: 21 pages
    Date of creation: May 2007
    Date of revision:
    Handle: RePEc:iza:izadps:dp2806
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    1. Dohmen, Thomas J & Falk, Armin & Huffman, David & Schupp, Jürgen & Sunde, Uwe & Wagner, Gert Georg, 2006. "Individual Risk Attitudes: New Evidence from a Large, Representative, Experimentally-Validated Survey," CEPR Discussion Papers 5517, C.E.P.R. Discussion Papers.
    2. Armin Falk & Ernst Fehr & Christian Zehnder, . "The Behavioral Effects of Minimum Wages," IEW - Working Papers 247, Institute for Empirical Research in Economics - University of Zurich.
    3. Bloemen, H.G. & Stancanelli, E.G.F., 1997. "Individual Wealth, Reservation Wages and Transitions into Employment," Discussion Paper 1997-02, Tilburg University, Center for Economic Research.
    4. Lancaster, Tony & Chesher, Andrew, 1983. "An Econometric Analysis of Reservation Wages," Econometrica, Econometric Society, vol. 51(6), pages 1661-76, November.
    5. Martin Feldstein & James M. Poterba, 1984. "Unemployment Insurance and Reservation Wages," NBER Working Papers 1011, National Bureau of Economic Research, Inc.
    6. Addison, John T. & Centeno, Mario & Portugal, Pedro, 2008. "Unemployment Benefits and Reservation Wages: Key Elasticities from a Stripped-Down Job Search Approach," IZA Discussion Papers 3357, Institute for the Study of Labor (IZA).
    7. Eckstein, Zvi & van den Berg, Gerard J., 2003. "Empirical Labor Search: A Survey," IZA Discussion Papers 929, Institute for the Study of Labor (IZA).
    8. Paul Frijters & Bas van der Klaau, 2003. "Job Search with Nonparticipation," Paul Frijters Discussion Papers 2003-3, School of Economics and Finance, Queensland University of Technology.
    9. Patrick Royston, 2005. "Multiple imputation of missing values: Update of ice," Stata Journal, StataCorp LP, vol. 5(4), pages 527-536, December.
    10. Jones, Stephen R G, 1988. "The Relationship between Unemployment Spells and Reservation Wages as a Test of Search Theory," The Quarterly Journal of Economics, MIT Press, vol. 103(4), pages 741-65, November.
    11. Jeffrey M. Wooldridge, 1999. "Asymptotic Properties of Weighted M-Estimators for Variable Probability Samples," Econometrica, Econometric Society, vol. 67(6), pages 1385-1406, November.
    12. Cox, James C & Oaxaca, Ronald L, 1992. "Direct Tests of the Reservation Wage Property," Economic Journal, Royal Economic Society, vol. 102(415), pages 1423-32, November.
    13. Cox, James C & Oaxaca, Ronald L, 1989. " Laboratory Experiments with a Finite-Horizon Job-Search Model," Journal of Risk and Uncertainty, Springer, vol. 2(3), pages 301-29, September.
    14. Jeffrey M. Wooldridge, 2002. "Inverse probability weighted M-estimators for sample selection, attrition and stratification," CeMMAP working papers CWP11/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
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