Does risk matter for occupational choices? Experimental evidence from an African labour market

Abstract

This paper investigates the role of risk-aversion in the allocation of workers between formal and informal jobs in Ghana. In the model I propose, risk-averse workers can opt between the free-entry informal sector and queuing for formal occupations. Conditional on identifying the riskier option, the model yields testable implications on the relationship between risk-preferences and workers' allocation. My testing strategy proceeds in two steps. First, I estimate expected income uncertainty through panel data and find it to be higher in the informal sector. Second, using novel experimental data to elicit individual attitudes to risk, I estimate the direct effect of risk-aversion on occupational choices and find that, in line with the first result, more risk-averse workers are more likely to queue for formal jobs and less likely to be in the informal sector. The results bear important implications for the optimal design of employment policies and social security.