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Human capital risk in life-cycle economies

Author

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  • Singh, Aarti
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.

Suggested Citation

  • Singh, Aarti, 2008. "Human capital risk in life-cycle economies," MPRA Paper 10292, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:10292
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    References listed on IDEAS

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    Cited by:

    1. Yena Park, 2014. "Constrained Efficiency in a Risky Human Capital Model," RCER Working Papers 585, University of Rochester - Center for Economic Research (RCER).
    2. Arpita Chatterjee & Aarti Singh & Tahlee Stone, 2016. "Understanding Wage Inequality in Australia," The Economic Record, The Economic Society of Australia, vol. 92(298), pages 348-360, September.
    3. Alok Kumar, 2019. "Earning Risks, Parental Schooling Investment, and Old-Age Income Support From Children," Department Discussion Papers 1903, Department of Economics, University of Victoria.
    4. Chih-Chin Ho & Ching-Yang Lin & Cheng-Tao Tang, 2013. "How Do Income and Bequest Taxes Affect Income Inequality? The Role of Parental Transfers," Working Papers EMS_2013_10, Research Institute, International University of Japan.

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    More about this item

    Keywords

    human capital risk; life-cycle; incomplete markets.;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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