revised version published in: Labour Economics, 2007, 14(6), 926-937
Utility theory suggests that foreseeable risk should increase the compensation for work. This
paper expands on this notion: on basis of utility theory, people should care not only about risk
but also about the skewness in the distribution of the compensation paid. In particular, because
the degree of risk aversion ought to decrease with income, people should appreciate a small
chance of a substantial gain; they should exhibit an “affection” for skewness. To test these
hypotheses, this paper carefully develops various measures of risk and skewness by
occupational/educational classification of the worker and finds supportive evidence: wages rise
with occupational earnings variance and decrease with skewness. In order to identify the
discount rate and the degree of risk aversion, we also apply structural modelling of education
and occupational choice and allow for non-lognormal wage distributions.
We use cookies to provide you with an optimal website experience. This includes cookies that are necessary for the operation of the site as well as cookies that are only used for anonymous statistical purposes, for comfort settings or to display personalized content. You can decide for yourself which categories you want to allow. Please note that based on your settings, you may not be able to use all of the site's functions.
Cookie settings
These necessary cookies are required to activate the core functionality of the website. An opt-out from these technologies is not available.
In order to further improve our offer and our website, we collect anonymous data for statistics and analyses. With the help of these cookies we can, for example, determine the number of visitors and the effect of certain pages on our website and optimize our content.