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Title: Essays on the effect of risk on wealth-enhancing investment decisions
Author: Chivers, David
ISNI:       0000 0004 5360 940X
Awarding Body: University of Manchester
Current Institution: University of Manchester
Date of Award: 2015
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This thesis provides two general equilibrium models to analyse the macroeconomic effect of risk on wealth-enhancing investment decisions. In chapter 1, we present an overlapping generations model in which aspirational agents face uncertainty about the returns to human capital. Investment in human capital requires external funding, implying a probability of bankruptcy that is greater the lower the human capital endowment of an agent. We show that agents with sufficiently low human capital endowments may experience such a strong influence of loss aversion that they abstain from human capital investment. We further show how this behaviour may be transmitted through successive generations to cause initial inequalities to persist. These results do not rely on any credit market imperfections. In chapter 2 we note that most working-age Americans obtain health insurance coverage through the workplace. U.S. law requires employers that offer health plans to use a price common to all in the group. However, the value of health insurance to risk-averse agents varies with their idiosyncratic health risk. Hence, linking employment and health insurance creates a wedge between the marginal cost and benefit of insurance. Since health risk can be sizable and health insurance is part of total employee compensation, the wedge can affect firm and employee decisions. We study the impact of this wedge on occupational choice, productivity and welfare in a general equilibrium model with agents who are endowed with idiosyncratic health risk and heterogeneous managerial ability. Agents choose whether to be a worker or an entrepreneur. We find that the wedge distorts occupational choice by causing two types of misallocations. Some highly skilled individuals with adverse health shocks leave entrepreneurship while individuals with intermediate skills but favourable health shocks opt to manage firms. Four policies are analysed: expansion of employer-based health insurance; private insurance; health insurance exchanges; and universal health coverage. Factor prices are determined endogenously and programs are financed by lump sum taxes. We assess the quantitative effects of the policies on firm size, productivity, GDP, and earnings. Welfare effects may be positive or negative, vary significantly with an individual's position in the asset and ability distributions, and are sensitive to changes in risk aversion.
Supervisor: Not available Sponsor: ESRC
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available