A Bound on Risk Aversion Using Labor Supply Elasticities

Raj Chetty

No 12067, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper shows that existing evidence on labor supply behavior places an upper bound on risk aversion in the expected utility model. I derive a formula for the coefficient of relative risk aversion (g) in terms of (1) the ratio of the income elasticity of labor supply to the wage elasticity and (2) the degree of complementarity between consumption and labor. I bound the degree of complementarity using data on consumption choices when labor supply varies randomly across states. Using labor supply elasticity estimates from thirty-three studies, I find a mean estimate of g = 1. I then show that generating g > 2 would require that wage increases cause sharper reductions in labor supply than estimated in any of the studies.

JEL-codes: D80 J20 J60 (search for similar items in EconPapers)
Date: 2006-03
New Economics Papers: this item is included in nep-lab and nep-upt
Note: AP EFG LS PE
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Citations: View citations in EconPapers (13)

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