Going the Gambler's Way - The Role of Individual Risk Attitudes in Occupational Choice

Ingo Isphording
University of Bochum, Germany

This study analyzes the effect of willingness to take risks on sorting decisions with respect to occupational earnings risk. Extending the procedure proposed by Bonin (2007) to the closer ISCO88 3-digit level by using information from the German Mikrozensus, earnings risk is computed from the residuals of Mincer style earnings regressions. Using individual information from the SOEP waves 2004 and 2006, it is shown that individual risk attitudes have a signicant impact on the sorting process. To control for unobserved heterogeneity, a Mundlak model is used to identify actual sorting decisions within the observational period. The identied effect of risk attitudes is considerably higher than in previous studies. A one-point increase of willingness to take risks (on the 0-10 scale of the SOEP) increases the earnings risk of the chosen occupation by 2 percent. This study is both related to previous studies concerning cross-sectional sorting processes (e.g. Bonin (2007)) and to the literature on risk attitudes and wage growth (see a for recent study e.g. Budria (2009)).

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