Risk Aversion and Schooling Decisions

Using unique Italian data in which individual differences in attitudes toward risk are measurable (from a lottery pricing question), we investigate the effect of the individual specific time invariant risk aversion factor on the probability of entering higher education. Apart from the risk aversion factor, absolute risk aversion depends on various state variables (wealth, liquidity constraints, background risk) and is assumed to be measured with non-classical error. We also take into account the endogeneity of the response to the risk aversion question, as well as potential non-classical measurement error in wealth. All model specifications point to the fact that individual specific risk aversion acts as a deterrent to higher education investment.