Human Capital as an Asset Class Implications From a General Equilibrium Model∗

This paper derives the value and the risk of aggregate human capital in a dynamic equilibrium production model with Duffie-Epstein preferences. In this setting the expected return of a risky asset is a function of the asset’s covariance with consumption growth and a weighted average of the asset’s covariance with aggregate wage growth and aggregate financial returns. A calibration of the model matching the historical ratio of wages to consumption in the United States (85% between 1950 and 2007) suggests that the weight of human capital in aggregate wealth is 87%. The results of the calibration follow from the relative size of wages and dividends in the economy and the dynamics of the ratio of wages to consumption, which are counter-cyclical. As a result, human capital is less risky than equity, implying that the risk premium of human capital is lower than that of equity. ∗The financial support of the Financial Markets Research Center, the Batten Institute, the Dean Witter Foundation and the White Foundation is gratefully appreciated. I thank Nigel Barradale, Jonathan Berk, Sebastien Betermier, Mario Capizzani, Jaime Cassasus, Pierre Collin-Dufresne, Stefano Corradin, Andrés Donangelo, Greg Duffee, Esther Eiling, Nicolae Gârleanu, Thomas Gilbert, Barney Hartman-Glaser, Sara Holland, Martin Lettau, Christine Parlour, Nishanth Rajan, Jacob Sagi, Adam Szeidl, Carles VergaraAlert, Johan Walden and seminar participants at Essec, HKUST, IESE, Indiana University, Instituto de Empresa, University of California Berkeley, University of Toronto and Vanderbilt for helpful comments and suggestions. Any errors remain my own. †Owen Graduate School of Management, Vanderbilt University. Email: [email protected]. Phone: +1(510)717-6453. Address: 401 21st Ave South, Nashville, Tennessee, 37203 (USA). http://owen.vanderbilt.edu/palacios