Human Capital Risk in Life-cycle Economies

I study the effect of market incompleteness on the aggregate econ-omy in a model where agents face idiosyncratic, uninsurable human capital investment risk. The environment is a general equilibrium life-cycle model with a version of a Ben-Porath (1967) human capital accu-mulation technology, modified to incorporate risk. A CARA-normal specification keeps endogenous decisions independent of individual shock realizations. I study stationary equilibria of calibrated cases in which idiosyncratic uninsurable risk arises from specialization risk and career risk. Specialization risk is such that both mean and variance of the return from training are increasing in the endogenous decision to invest in human capital. In the case of career risk, however, only the mean return is increasing in the decision to invest in human cap-ital. With career risk only, stationary equilibria resemble those stud-ied by Aiyagari (1994), and one concludes that the impact of uninsur