A Further Note on the Theory of Labor Supply with Wage Rate Uncertainty : Comment

Abstract

In this Journal (1994), Horowitz uses a mean-variance approach to demonstrate that Kim's (1994) comparative statics results concerning the effect of an increase in risk on labor supply established in the framework of the expected utility hypothesis can be also derived when variance is used as a measure of changes in risk. The merit of Horowitz's contribution is that. for small risks, it makes the consistency between two approaches for two-argument utility function more clearly known. However, Horowitz's results obtained in the framework of the mean-variance approach are consistent with prediction reached by Kim only when a restriction is imposed on the type of an increase in risk. The purpose of this note is to clarify that Horowitz's conclusions do not hold in general but when a specific condition on the random variable in a choice set is assumed or satisfied.