DP3600 Earnings Dispersion, Risk Aversion and Education

Author(s): Christian Belzil, Jörgen Hansen
Publication Date: October 2002
Keyword(s): dynamic programming, earnings dispersion, human capital, returns to education, risk aversion
JEL(s): J20, J30
Programme Areas: Labour Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3600

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.