Working Paper: CEPR ID: DP3600
Authors: Christian Belzil; Jrgen Hansen
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; earnings dispersion; human capital; returns to education; risk aversion
JEL Codes: J20; J30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| risk aversion (D81) | schooling attainments (I21) |
| risk aversion (D81) | mean schooling (I20) |
| schooling (I21) | wage dispersion (J31) |
| schooling (I21) | employment rate dispersion (J69) |
| schooling (I21) | total risk in earnings (G17) |
| schooling (I21) | earnings risk (J31) |