published in: Research in Labor Economics, 2004, 23, 335-358
We estimate a dynamic programming model of schooling decisions in which the degree of
risk aversion can be inferred from schooling decisions. In our model, individuals are
heterogeneous with respect to school and market abilities but homogeneous with respect to
the degree of risk aversion. We allow endogenous schooling attainments to affect the level of
risk experienced in labor market earnings through wage dispersion and employment rate
dispersion. We find a low degree of relative risk aversion (0.9282) and the estimates indicate
that both wage and employment rate dispersions decrease significantly with schooling
attainments. We find that a counterfactual increase in risk aversion will increase schooling
attainments. Finally, the low degree of risk aversion implies that an increase in earnings
dispersion would have little effect on schooling attainments.
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