Risks to Human Capital

84 Pages Posted: 5 Sep 2019 Last revised: 7 Jul 2020

See all articles by Mehran Ebrahimian

Mehran Ebrahimian

University of Pennsylvania - The Wharton School

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: July 5, 2020

Abstract

Do financing constraints deepen recessions? To help 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 intermediate states of the world,
individuals acquire skill; however outside investors and individuals inefficiently share risk. We show that this simple moral hazard problem, combined with risk aversion of individuals and outside investors, leads to disaster states that fall especially heavily on some agents but not on others. The model implies a realistic equity premium and a low riskfree rate. We show that the possibility of disaster states distorts risk prices, even under calibrations in which they never occur in equilibrium.

Keywords: Financing Frictions, Rare Events, Moral Hazard

JEL Classification: G12, G32

Suggested Citation

Ebrahimian, Mehran and Wachter, Jessica A., Risks to Human Capital (July 5, 2020). Available at SSRN: https://ssrn.com/abstract=3443906 or http://dx.doi.org/10.2139/ssrn.3443906

Mehran Ebrahimian

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Jessica A. Wachter (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-7634 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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