The Choice of Institutions: The Role of Risk and Risk-Aversion
Diana Weinhold () and
Paul J. Zak
Additional contact information
Paul J. Zak: Claremont Graduate University
Others from University Library of Munich, Germany
Institutions can affect individual behavior both via their efficiency impact and via their risk reducing mechanisms. However there has been little study of the relative importance of these two channels in how individuals choose between simultaneously extant institutions. This paper presents a simple model of institutional choice in a labor market when there is a risk/reward trade-off, and tests the predictions of the theory. Using a novel empirical approach that adapts an ARCH-in-mean to cross-sectional survey data from China, we find that risk and risk aversion are strongly related to the choice of a labor market institution. Further, risk and risk aversion are quantitatively more important than the sectoral wage differential in explaining employment institution choices. Specifically, we find that wage risk has two orders of magnitude greater impact on labor market institutional choice than the wage difference, with a one standard deviation increase in earnings risk reducing the number of workers choosing jobs in the private (risky) sector by 22%.
Keywords: Institutions; Risk; Labor Market; Risk Aversion (search for similar items in EconPapers)
JEL-codes: J21 J40 P3 (search for similar items in EconPapers)
Pages: 22 pages
New Economics Papers: this item is included in nep-lab
Note: Type of Document - pdf; pages: 22
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpot:0508004
Access Statistics for this paper
More papers in Others from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ().