Risk Aversion and Human Capital Investment: A Structural Econometric Model

Thomas Brodaty, Robert Jean Michel Gary-Bobo () and Ana Prieto

No 5694, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We propose to model individual educational investments as a rational decision, maximizing expected utility, conditional on some characteristics observed by the student, under the combined risks affecting future wages and schooling duration. Assuming that students' attitudes toward risk can be represented by a CRRA utility, we show that the risk-aversion parameter can be identified in a natural way, using the variation in school-leaving ages, conditional on certified educational levels. Estimation can be performed by means of classic Maximum Likelihood methods. The model can easily be compared with a non-structural, simplified version, which is a standard wage equation with endogenous dummy variables representing education levels, education levels being themselves determined by an Ordered Probit model. We find small but significant values of the coefficient of relative risk aversion, between 0.1 and 0.9. These results are obtained with a rich sample of 12,500 young men who left the educational system in 1992, in France.

Keywords: econometrics; human capital; returns to education; risk aversion (search for similar items in EconPapers)
JEL-codes: I2 J24 J31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dcm, nep-edu and nep-upt
Date: 2006-06
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