Risks to Human Capital / Mehran Ebrahimian, Jessica Wachter.

Format:

Book

Author/Creator:

Ebrahimian, Mehran.

Contributor:

National Bureau of Economic Research.

Wachter, Jessica.

Series:

Working Paper Series (National Bureau of Economic Research) no. w26823.

NBER working paper series no. w26823

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

What is the connection between financing constraints and the equity premium? To answer this question, we build a model with inalienable human capital, in which investors finance individuals who can potentially become skilled. Though investment in skill is always optimal, it does not take place in some states of the world, due to moral hazard. In other states of the world, individuals acquire skill; however outside investors and individuals inefficiently share risk. We show that this simple moral hazard problem and the resultant financing friction leads to a realistic equity premium, a low riskfree rate, and severe negative consequences for distribution of wealth and for welfare. When investment fails to take place, the economy enters an endogenous disaster state. We show that the possibility of these disaster states distorts risk prices, even under calibrations in which they never occur in equilibrium.

Notes:

Print version record

March 2020.