A New Method of Estimating Risk Aversion
American Economic Review
vol. 96,
no. 5, December 2006
(pp. 1821-1834)
Abstract
I show existing evidence on labor supply behavior places an upper bound on risk aversion in the expected utility model. I derive a formula for the coefficient of relative risk aversion (γ) in terms of the ratio of the income elasticity of labor supply to wage elasticity and degree of complementarity between consumption and labor. I bound the degree of complementarity using data on consumption choices when labor supply varies across states. Using labor supply elasticity estimates, I find a mean estimate of γ ≈ 1, then show generating γ > 2 requires that wage increases cause sharper labor supply reductions. (JEL D81 J22 )Citation
Chetty, Raj. 2006. "A New Method of Estimating Risk Aversion." American Economic Review, 96 (5): 1821-1834. DOI: 10.1257/aer.96.5.1821JEL Classification
- D81 Criteria for Decision-Making under Risk and Uncertainty
- D91 Intertemporal Household Choice; Life Cycle Models and Saving
- J22 Time Allocation and Labor Supply