Working Paper: NBER ID: w9988
Authors: Raj Chetty
Abstract: This paper develops a method of estimating the coefficient of relative risk aversion (g) from data on labor supply. The main result is that existing estimates of labor supply elasticities place a tight bound on g, without any assumptions beyond those of expected utility theory. It is shown that the curvature of the utility function is directly related to the ratio of the income elasticity of labor supply to the wage elasticity, holding fixed the degree of complementarity between consumption and leisure. The degree of complementarity can in turn be inferred from data on consumption choices when employment is stochastic. Using a large set of existing estimates of wage and income elasticities, I find a mean estimate of g = 1. I also give a calibration argument showing that a positive uncompensated wage elasticity, as found in most studies of labor supply, implies g < 1.25. The estimate of g changes by at most 0.25 over the range of plausible values for the complementarity parameter.
Keywords: No keywords provided
JEL Codes: D8; G12; J22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| coefficient of relative risk aversion (D11) | ratio of income elasticity of labor supply to wage elasticity (J39) |
| curvature of the utility function (D11) | labor supply response to changes in wages and income (J20) |
| larger curvature of the utility function (D11) | greater reduction in labor supply when income rises (J22) |
| higher risk aversion (D81) | lower labor supply elasticity (J20) |
| estimates of risk aversion (D11) | robust against biases arising from myopia or overconfidence (G41) |
| risk aversion estimates (D81) | insensitive to variations in degree of complementarity between consumption and leisure (D10) |