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How important to well-being is choosing a career with the right fit? This question is difficult to answer because we observe individuals only in their chosen careers, not in the other (presumably inferior) options they did not choose. To overcome this problem, we use expected utility to cardinalize a logit model of career choice in a setting where we observe the income risk of chosen careers and the risk-aversion of the people who choose them. The key parameter of interest - the importance of idiosyncratic taste and skill in career choice - is identified from the shift in the distribution of income risk with risk aversion. We estimate the model using individual-specific measures of income volatility to proxy for income risk and survey questions about hypothetical income gambles to proxy for risk preference, both from the PSID. We separate idiosyncratic career taste from skill using the pay gap between high and low-income risk people with high and low risk-aversion.
Occupational choice, career choice, income risk, idiosyncratic taste and skill
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All findings, interpretations, and conclusions of this paper do not represent the views of the the Wharton School or the Boettner Center for Pensions and Retirement Research. © 2012 Boettner Center of the Wharton School of the University of Pennsylvania. All rights reserved.
The project described was supported by the National Institute on Aging, P30 AG-012836-18, the Boettner Center for Pensions and Retirement Security, and National Institutes of Health – National Institute of Child Health and Development Population Research Infrastructure Program R24 HD-044964-9, all at the University of Pennsylvania. The content is solely the responsibility of the authors and does not necessarily represent the official views of the National Institute of Aging or the National Institutes of Health. We thank Ellie Pavlick for excellent research assistance. We thank seminar participants at Dartmouth College, Brown University, the University of Maryland – College Park, Kyoto University, the Bureau of Labor Statistics, the Risk Theory Society 2010 meeting, the SOLE/EALE 2010 meeting, the 2010 NBER Summer Institute, New York University, the University of North Carolina, and the University of Nevada Las Vegas. Previous versions of this draft have circulated as “The Human Capital Risk-Return Menu” and “A Structural Model of Career Choice.” A
Date Posted: 28 June 2019