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Title: Risky Investment and Matching

Citation Type: Miscellaneous

Publication Year: 2017

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Abstract: This paper studies the effects of changes in risk in an equilibrium matching framework with pre-match investment. A prominent economic application is to labor markets where workers can invest in education before matching with firms: at the investment stage, workers are uncertain about how skilled they will turn out and also about the prevailing state of the market at the time of employment. We provide conditions on primitives – on the match output function and risk attitudes – for stochastically better or more variable risks to induce more investment, and show also how this affects equilibrium matching and wages. We then illustrate the usefulness of our framework by studying three economic applications, namely, how changes in (i) risk stemming from skill biased technological change, (ii) wage uncertainty, or (iii) college completion risk affect investment choices and labor market outcomes. For each of them, we provide suggestive evidence from the US that is in line with the predictions of our model.

Url: http://www.public.asu.edu/~hchade/papers/RIM_0617.pdf

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Authors: Chade, Hector; Lindenlaub, Ilse

Publisher: Arizona State University

Data Collections: IPUMS USA

Topics: Labor Force and Occupational Structure

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