Earnings Dispersion, Risk Aversion and Education
26 Pages Posted: 4 Dec 2002
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Earnings Dispersion, Risk Aversion and Education
Date Written: October 2002
Abstract
We estimate a dynamic programming model of schooling decisions in which the degree of risk aversion can be inferred from schooling decisions. In our model, individuals are heterogeneous with respect to school and market abilities but homogeneous with respect to the degree of risk aversion. We allow endogenous schooling attainments to affect the level of risk experienced in labour market earnings through wage dispersion and employment rate dispersion. We find a low degree of relative risk aversion (0.9282) and find that a counterfactual increase in risk aversion will increase schooling attainments. The estimates indicate that both wage and employment rate dispersions decrease significantly with schooling attainments.
Keywords: Dynamic programming, returns to education, risk aversion, human capital, earnings dispersion
JEL Classification: J20, J30
Suggested Citation: Suggested Citation
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