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A Bound on Risk Aversion Using Labor Supply Elasticities

  • Raj Chetty

This paper shows that existing evidence on labor supply behavior places an upper bound on risk aversion in the expected utility model. I derive a formula for the coefficient of relative risk aversion (g) in terms of (1) the ratio of the income elasticity of labor supply to the wage elasticity and (2) the degree of complementarity between consumption and labor. I bound the degree of complementarity using data on consumption choices when labor supply varies randomly across states. Using labor supply elasticity estimates from thirty-three studies, I find a mean estimate of g = 1. I then show that generating g > 2 would require that wage increases cause sharper reductions in labor supply than estimated in any of the studies.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12067.

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Date of creation: Mar 2006
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Handle: RePEc:nbr:nberwo:12067
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