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Risk and the Misallocation of Human Capital


Time: 10:00 am- 11:30 am, May 12th, 2023

Platform: Zoom

Speaker: German Cubas

(University of Houston)

Link: https://zoom.us/j/96990174936?pwd=ejhZazZqRFZLa2duWXlXZ3B2K2ludz09

Meeting ID: 969 9017 4936

Passcode: inse



With risk-averse workers and uninsurable earnings shocks, competitive markets allocate too few workers to jobs with high earnings uncertainty. Using an equilibrium Roy model with incomplete markets, we show that risky occupations are inefficiently small and hence talent is misallocated. We obtain analytical expressions for the compensation for risk in the labor market, and for the aggregate level of human capital and output. We also study the welfare properties of the economy and derive solutions for both the first-best allocation and the constrained- efficient allocation. Misallocation is positively related to the correlation between a worker’s abilities in different occupations. Quantitatively we find that market incompleteness can by itself generate permanent output and welfare losses in the order of one percent of GDP. Around 35% of the loss is due to the presence of the pecuniary externality.





Professor German Cubas is an Associate Professor in the Department of Economics at the University of Houston. His research interests are Macroeconomics, Economic Growth and Development and Labor Economics. His work has been published in American Economic Association P&PInternational Economic ReviewReview of Economic DynamicsEuropean Economic ReviewReview of Economic Dynamic and Review of Economic Dynamics. He obtained his Ph.D. in economics from University of Iowa in 2010.