Eliciting earnings risk from labor and capital income
Earnings risk is an inherently subjective concept. Observing volatile earnings paths does not necessarily imply that the perceived earnings risk is large. If a drastic change in earnings is known well in advance, there is no additional risk involved. Individuals are likely to have more information about their earnings prospects than the observing econometrician. Since it is the subjectively perceived earnings risk that in uences economic decisions like consumption, we need to develop methods that allow to elicit the perceived risk from observable variables. This paper suggests an estimation method based on variables that are not only observable in principle, but can be observed in fact in many panel data sets.
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