American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Risk Aversion and the Labor Margin in Dynamic Equilibrium Models
American Economic Review
vol. 102,
no. 4, June 2012
(pp. 1663–91)
Abstract
The household's labor margin has a substantial effect on risk aversion, and hence asset prices, in dynamic equilibrium models even when utility is additively separable between consumption and labor. This paper derives simple, closed-form expressions for risk aversion that take into account the household's labor margin. Ignoring this margin can dramatically overstate the household's true aversion to risk. Risk premia on assets priced with the stochastic discount factor increase essentially linearly with risk aversion, so measuring risk aversion correctly is crucial for asset pricing in the model.Citation
Swanson, Eric T. 2012. "Risk Aversion and the Labor Margin in Dynamic Equilibrium Models." American Economic Review, 102 (4): 1663–91. DOI: 10.1257/aer.102.4.1663Additional Materials
JEL Classification
- D11 Consumer Economics: Theory
- D81 Criteria for Decision-Making under Risk and Uncertainty
- G12 Asset Pricing; Trading volume; Bond Interest Rates
- J22 Time Allocation and Labor Supply
- O41 One, Two, and Multisector Growth Models