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Labour Income Uncertainty, Risk Aversion and Home Ownership

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  • Diaz-Serrano, Luis

    (Universitat Rovira i Virgili)

Abstract

In this paper we investigate the effect of labour income uncertainty on the probability of homeownership in Germany and Spain. This study is motivated by two facts. Firstly, theoretical models tend to provide ambiguous results in this issue. Secondly, there is limited previous empirical evidence and the existing focuses exclusively on the US housing market. We claim that more international evidence is necessary in order to disentangle this puzzle. We develop a simple theoretical formula that highlights the pivotal role of risk attitudes in the housing tenure decisions that also allow us to introduce the concept of "skewness affection" as a relevant phenomenon. To carry out this test we propose an income uncertainty measure based on panel data labour income equations. We observe that households facing increasing income uncertainty display preference for renting while those located in a positively skewed income distribution show a greater propensity for homeownership. Income uncertainty analysis in housing decisions has important implications for the design of public housing policies and also for the design of private mortgage insurance products.

Suggested Citation

  • Diaz-Serrano, Luis, 2004. "Labour Income Uncertainty, Risk Aversion and Home Ownership," IZA Discussion Papers 1008, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp1008
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    References listed on IDEAS

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    8. Luis Diaz‐Serrano & Joop Hartog & Helena Skyt Nielsen, 2008. "Compensating Wage Differentials for Schooling Risk in Denmark," Scandinavian Journal of Economics, Wiley Blackwell, vol. 110(4), pages 711-731, December.
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    Cited by:

    1. Hideaki Tamura & Yoichi Matsubayashi, 2014. "A New Solution to the Equity Premium Puzzle and the Risk-Free Rate Puzzle: Theory and Evidence," Discussion Papers 1422, Graduate School of Economics, Kobe University.

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    More about this item

    Keywords

    credit constraints; earnings uncertainty; risk aversion; skewness affection; homeownership; transitory shocks in income;
    All these keywords.

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • R0 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General
    • J0 - Labor and Demographic Economics - - General

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