A Bound on Risk Aversion Using Labor Supply Elasticities

34 Pages Posted: 9 May 2006 Last revised: 23 Dec 2022

See all articles by Raj Chetty

Raj Chetty

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

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

Chetty, Nadarajan (Raj), A Bound on Risk Aversion Using Labor Supply Elasticities (March 2006). NBER Working Paper No. w12067, Available at SSRN: https://ssrn.com/abstract=888269

Nadarajan (Raj) Chetty (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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