Does Relative Risk Aversion explain educational inequality? A dynamic choice approach

The theory of Relative Risk Aversion (RRA) suggests that educational decision making is motivated by the individual's desire to avoid downward social class mobility and, furthermore, that this desire is stronger than the desire to pursue upward mobility. This paper develops a Dynamic Decision Process (DDP) model which tests the two central behavioral assumptions in the RRA theory that (1) individuals maximize utility when making educational decisions and (2) the RRA mechanism comprises an important component in the educational decision-making process. Furthermore, our DDP model allows for class-specific cultural values regarding education. We analyze data from the Danish Youth Longitudinal Study and find strong evidence that RRA affects educational decisions over and above traditional socioeconomic factors.