Insurance and Opportunities : A Welfare Analysis of Labor Market Risk

  title={Insurance and Opportunities : A Welfare Analysis of Labor Market Risk},
  author={Jonathan Heathcote and Kjetil Storesletten and Giovanni L. Violante},
Using a model with constant relative risk-aversion preferences, endogenous labor supply and partial insurance against idiosyncratic wage risk, the paper provides an analytical characterization of three welfare effects: (a) the welfare effect of a rise in wage dispersion, (b) the welfare gain from completing markets, and (c) the welfare effect from eliminating risk. Our analysis reveals an important trade-off for these welfare calculations. On the one hand, higher wage uncertainty increases the… CONTINUE READING
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