Labor Supply, Self-insurance and Knightian Uncertainty
نویسنده
چکیده
The focus of this paper is on the implications of income uncertainty for the optimal labor supply. The meaningful distinction between Knightian uncertainty, which is often attributed to Frank Knight (1921), and risk is allowed. Agents are both uncertainty averse and risk averse. The labor-leisure and the labor-leisure-saving choices are studied under Knightian uncertainty in one-period and two-period setting, respectively. The multiple-priors utility model is adopted. The effects of income uncertainty on optimal labor supply are analyzed by deriving closed form solutions. Using data from Panel Survey of Income Dynamics (PSID) on self-employed American males, we find that, income uncertainty, proxied by the wage dispersion in different industries, plays an important role in determining male self-employed labor supply. JEL Classifications: D81, J22, J23
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