A Bound on Risk Aversion Using Labor Supply Elasticities
34 Pages Posted: 9 May 2006 Last revised: 23 Dec 2022
Date Written: March 2006
Abstract
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.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Behavioral Public Economics: Welfare and Policy Analysis with Non-Standard Decision-Makers
-
"Will Social Security Be There for You?": How Americans Perceive Their Benefits
By Jeff Dominitz, Jordan Heinz, ...
-
Myopia and the Effects of Social Security and Capital Taxation on Labor Supply
By Louis Kaplow