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Oxford Economic Papers Advance Access originally published online on March 30, 2005
Oxford Economic Papers 2005 57(3):545-557; doi:10.1093/oep/gpi029
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Right arrow D81 - Criteria for Decision-Making under Risk and Uncertainty
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© Oxford University Press 2005; All rights reserved

Duality and the Slutsky income and substitution effects of increases in wage rate uncertainty

Carmen F. Menezes* and X. Henry Wang{dagger}

*University of Missouri-Columbia {dagger}Department of Economics, University of Missouri-Columbia, Columbia, MO 6211, USA; e-mail: WangX{at}missouri.edu

The labor supply decision under wage rate uncertainty has received considerable attention in the literature. While the literature has obtained the Slutsky decomposition for an increase in the expected wage rate under uncertainty, it has yet to provide a Slutsky decomposition for an increase in wage rate uncertainty. This paper uses duality to obtain such decomposition. Under plausible assumptions about preferences, the Slutsky income effect is positive while the Slutsky substitution effect is negative. This confirms the intuition in the literature that the total effect of an increase in wage uncertainty is the composite of opposing tendencies.

Key Words: JEL classification: D81


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