Economic Modeling Text on Ben-Porath Framework and Risk Theory

My model is the same as Ben-Porath’s from birth to independence. All consumption and all work are invested, for modeling purposes, until schooling ends at full-time job entry. I model this transition at age 20. Pay, realized work, human depreciation and pure consumption all begin at that point, although human depreciation begins at essentially zero. Self-invested work continues as an important but diminishing share of work until late in careers, just as in Ben-Porath. | differ from him mildly in that I model all adult consumption as pure consumption. Ben-Porath allows adult invested consumption without assuming it. | regard it as real but negligible. Age-wage profiles are explained by self-invested work and depreciation theory alone. I model this self-invested work as subliminal accumulation of job experience. My reason is personal observation. What I have seen in plants and offices is people working full time on the job. We don’t take time off to learn. Experience simply arrives, much as free growth does. | think that my view on this contradicts Ben- Porath’s marginally. He seems to allow some such allocation of time to help explain age-wage profiles. Next comes retirement. | model this as just shown. Later I will expand this model to include acquisition and disposal of physical capital too. The combined model will give most of the math and mechanics of next generation theory. Risk Theory For practical purposes, economic risk is usually measured as expected standard deviation in rate of return. Safer assets vary less from their return norms. Short- term treasuries are thought safest because they combine fixed nominal return with fast liquidity in case inflation threatens. The market overall bids safer expected outputs up and riskier ones down. Since asset value is the denominator in rate of return, and output the numerator, the effect is make risker assets higher in return. Chapter 2: Fast Forward 1/06/16 24 HOUSE_OVERSIGHT_010964