IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Human capital risk in life-cycle economies

  • Singh, Aarti

I study the effect of market incompleteness on the aggregate economy in a model where agents face idiosyncratic, uninsurable human capital investment risk. The environment is a general equilibrium lifecycle model with a version of a Ben-Porath (1967) human capital accumulation technology, modified to incorporate risk. A CARA-normal specification keeps endogenous decisions independent of individual shock realizations. I study stationary equilibria of calibrated cases in which idiosyncratic uninsurable risk arises from specialization risk and career risk. Specialization risk is such that both mean and variance of the return from training are increasing in the endogenous decision to invest in human capital. In the case of career risk, however, only the mean return is increasing in the decision to invest in human capital. With career risk only, stationary equilibria resemble those studied by Aiyagari (1994), and one concludes that the impact of uninsurable idiosyncratic risk is relatively small. With a significant amount of specialization risk however, stationary equilibria are severely distorted relative to a complete markets benchmark. One aspect of this distortion is that human capital is only about 57 percent as large as its complete markets counterpart. This suggests that the two types of risk have very different and quantitatively significant general equilibrium implications. Keywords: Human capital risk, life-cycle, incomplete markets.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://mpra.ub.uni-muenchen.de/10292/1/MPRA_paper_10292.pdf
File Function: original version
Download Restriction: no

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10292.

as
in new window

Length:
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:pra:mprapa:10292
Contact details of provider: Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page: https://mpra.ub.uni-muenchen.de

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Christiansen, Charlotte & Joensen, Juanna Schroter & Nielsen, Helena Skyt, 2007. "The risk-return trade-off in human capital investment," Labour Economics, Elsevier, vol. 14(6), pages 971-986, December.
  2. Martin Browning & Lars Peter Hansen & James J. Heckman, 1999. "Micro Data and General Equilibrium Models," Discussion Papers 99-10, University of Copenhagen. Department of Economics.
  3. George-Marios Angeletos & Laurent Calvet, 2003. "Idiosyncratic Production Risk, Growth, and the Business Cycle," NBER Working Papers 9764, National Bureau of Economic Research, Inc.
  4. James S. Costain & Michael Reiter, 2004. "Stabilization versus insurance: Welfare effects of procyclical taxation under incomplete markets," Economics Working Papers 890, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2005.
  5. Heathcote, Jonathan & Storesletten, Kjetil & Violante, Giovanni L, 2004. "Two Views of Inequality Over the Life-Cycle," CEPR Discussion Papers 4728, C.E.P.R. Discussion Papers.
  6. Card, David, 2001. "Estimating the Return to Schooling: Progress on Some Persistent Econometric Problems," Econometrica, Econometric Society, vol. 69(5), pages 1127-60, September.
  7. Jonathan Eaton & Harvey Rosen, 1979. "Taxation, Human Capital and Uncertainty," Working Papers 497, Princeton University, Department of Economics, Industrial Relations Section..
  8. Calvet, Laurent E., 2001. "Incomplete Markets and Volatility," Journal of Economic Theory, Elsevier, vol. 98(2), pages 295-338, June.
  9. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2000. "Consumption and Risk Sharing Over the Life Cycle," NBER Working Papers 7995, National Bureau of Economic Research, Inc.
  10. James J. Heckman & Lance Lochner & Christopher Taber, 1998. "Explaining Rising Wage Inequality: Explorations with a Dynamic General Equilibrium Model of Labor Earnings with Heterogeneous Agents," NBER Working Papers 6384, National Bureau of Economic Research, Inc.
  11. Pedro Carneiro & Karsten T. Hansen & James J. Heckman, 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College," NBER Working Papers 9546, National Bureau of Economic Research, Inc.
  12. Mark Huggett & Gustavo Ventura & Amir Yaron, 2007. "Sources of Lifetime Inequality," Working Papers gueconwpa~07-07-04, Georgetown University, Department of Economics.
  13. Ignacio Palacios-Huerta, 2003. "An Empirical Analysis of the Risk Properties of Human Capital Returns," American Economic Review, American Economic Association, vol. 93(3), pages 948-964, June.
  14. James Bullard & James Feigenbaum, 2006. "A leisurely reading of the life-cycle consumption data," Working Papers 2003-017, Federal Reserve Bank of St. Louis.
  15. Pijoan-Mas, Josep, 2005. "Precautionary Savings or Working Longer Hours?," CEPR Discussion Papers 5322, C.E.P.R. Discussion Papers.
  16. Marcet, Albert & Obiols-Homs, Francesc & Weil, Philippe, 2007. "Incomplete markets, labor supply and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2621-2635, November.
  17. Fatih Guvenen, 2005. "Learning Your Earning: Are Labor Income Shocks Really Very Persistent?," Macroeconomics 0507004, EconWPA.
  18. Bénabou, Roland, 2000. "Tax And Education Policy In A Heterogeneous Agent Economy: What Levels Of Redistribution Maximize Growth And Efficiency?," CEPR Discussion Papers 2446, C.E.P.R. Discussion Papers.
  19. Pedro Carneiro & Karsten T. Hansen & James J. Heckman, 2003. "2001 Lawrence R. Klein Lecture Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College Choice," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 361-422, 05.
  20. Angus Deaton & Christina Paxson, 1993. "Intertemporal Choice and Inequality," NBER Working Papers 4328, National Bureau of Economic Research, Inc.
  21. Carneiro, Pedro & Hansen, Karsten T. & Heckman, James J., 2003. "Estimating Distributions of Treatment Effects with an Application to the Returns to Schooling and Measurement of the Effects of Uncertainty on College Choice," IZA Discussion Papers 767, Institute for the Study of Labor (IZA).
  22. Bewley, Truman, 1977. "The permanent income hypothesis: A theoretical formulation," Journal of Economic Theory, Elsevier, vol. 16(2), pages 252-292, December.
  23. Cunha, Flavio & Heckman, James & Navarro, Salvador, 2004. "Separating uncertainty from heterogeneity in life cycle earnings," Working Paper Series 2005:6, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  24. Leena Rudanko, 2007. "Idiosyncratic and Aggregate Risk in a Frictional Labor Market," 2007 Meeting Papers 168, Society for Economic Dynamics.
  25. Pereira, Pedro T. & Martins, Pedro S., 2001. "Is there a Return-Risk Link in Education?," IZA Discussion Papers 321, Institute for the Study of Labor (IZA).
  26. Gomes, Joao & Greenwood, Jeremy & Rebelo, Sergio, 2001. "Equilibrium unemployment," Journal of Monetary Economics, Elsevier, vol. 48(1), pages 109-152, August.
  27. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
  28. Grossmann, Volker, 2003. "Risky Human Capital Investment, Income Distribution, and Macroeconomic Dynamics," IZA Discussion Papers 955, Institute for the Study of Labor (IZA).
  29. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
  30. Tom Krebs, 2003. "Human Capital Risk And Economic Growth," The Quarterly Journal of Economics, MIT Press, vol. 118(2), pages 709-744, May.
  31. Christopher D Carroll & Miles S Kimball, 2001. "Liquidity Constraints and Precautionary Saving," Economics Working Paper Archive 455, The Johns Hopkins University,Department of Economics.
  32. Rios-Rull, Jose-Victor, 1996. "Life-Cycle Economies and Aggregate Fluctuations," Review of Economic Studies, Wiley Blackwell, vol. 63(3), pages 465-89, July.
  33. Ananth Seshadri & Rodolfo Manuelli, 2005. "Human Capital and the Wealth of Nations," 2005 Meeting Papers 56, Society for Economic Dynamics.
  34. Huggett, Mark, 1997. "The one-sector growth model with idiosyncratic shocks: Steady states and dynamics," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 385-403, August.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:10292. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.