Singh, Aarti (2008): Human capital risk in life-cycle economies.
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Abstract
I study the effect of market incompleteness on the aggregate economy in a model where agents face idiosyncratic, uninsurable human capital investment risk. The environment is a general equilibrium lifecycle model with a version of a Ben-Porath (1967) human capital accumulation technology, modified to incorporate risk. A CARA-normal specification keeps endogenous decisions independent of individual shock realizations. I study stationary equilibria of calibrated cases in which idiosyncratic uninsurable risk arises from specialization risk and career risk. Specialization risk is such that both mean and variance of the return from training are increasing in the endogenous decision to invest in human capital. In the case of career risk, however, only the mean return is increasing in the decision to invest in human capital. With career risk only, stationary equilibria resemble those studied by Aiyagari (1994), and one concludes that the impact of uninsurable idiosyncratic risk is relatively small. With a significant amount of specialization risk however, stationary equilibria are severely distorted relative to a complete markets benchmark. One aspect of this distortion is that human capital is only about 57 percent as large as its complete markets counterpart. This suggests that the two types of risk have very different and quantitatively significant general equilibrium implications. Keywords: Human capital risk, life-cycle, incomplete markets.
Item Type: | MPRA Paper |
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Original Title: | Human capital risk in life-cycle economies |
Language: | English |
Subjects: | E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E24 - Employment ; Unemployment ; Wages ; Intergenerational Income Distribution ; Aggregate Human Capital ; Aggregate Labor Productivity E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E20 - General |
Item ID: | 10292 |
Depositing User: | Singh |
Date Deposited: | 06 Sep 2008 09:21 |
Last Modified: | 26 Sep 2019 17:36 |
References: | Angeletos, G-M. and L.E. Calvet. 2006. “Idiosyncratic production Risk, Growth and the Business Cycle.” Journal of Monetary Economics, 53, 1095-1115. Aiyagari, S.R. 1994. “Uninsured Idiosyncratic Risk and Aggregate Saving.” Quarterly Journal of Economics, 109, 659-684. Huggett, M., G. Ventura, and A. Yaron. 2007. “Sources of Lifetime Inequality.” manuscript Krebs, T. 2003. “Human Capital Risk and Economic Growth.” Quarterly Journal of Economics, 118, 709-744. |
URI: | https://mpra.ub.uni-muenchen.de/id/eprint/10292 |