Modeling Human Capital in Life-Cycle Portfolio Choice : Riskless or Risky?

We study the impact of risky human capital in life-cycle portfolio choice and survey the academic literature on the optimal asset allocation over the individual's life-cycle. A distinction is made between the riskless conception of human capital as having bond-like characteristics, and the risky conception of seeing this future income stream as having stock-like properties. In particular, attention will be paid to the models presented in Cocco, Gomes, and Maenhout (2005) and Benzoni, Collin-Dufresne, and Goldstein (2007). We use the idea of Benzoni et al. (2007) to study the welfare implications of portfolio choice when labor income and dividends are co-integrated. This dynamic portfolio choice problem is analyzed for two sectors, public and construction, and for the Netherlands as a whole. The results indicate that hump-shaped asset allocations are welfare improving for all three groups. However, our results are more moderate compared to Benzoni et al. (2007) as we find positive asset holdings in the beginning of the agent's career instead of zero (or even negative) holdings. These discrepancies might be explained by a difference in wage profiles between the US and the Netherlands