DP3600 Earnings Dispersion, Risk Aversion and Education

Author(s): Christian Belzil , Jörgen Hansen

Publication Date: October 2002

Keyword(s): dynamic programming , returns to education , risk aversion , human capital , earnings dispersion

JEL(s): J20 , J30

Programme Areas: Labour Economics

Link to this Page: www.cepr.org/pubs/dps/DP3600.asp

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.