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Income inequality and risk taking: the impact of social comparison information

Author

Listed:
  • Ulrich Schmidt

    (Kiel Institute for the World Economy
    Kiel University
    University of Johannesburg)

  • Levent Neyse

    (Kiel Institute for the World Economy
    SOEP at German Institute for Economic Research (DIW))

  • Milda Aleknonyte

    (Kiel Institute for the World Economy)

Abstract

In contrast to the assumptions of standard economic theory, recent experimental evidence shows that the income of peers has a systematic impact on observed degrees of risk aversion. This paper reports the findings of two experiments examining the impact of income inequality on risk preferences and whether the knowledge of inequality mediates the decisions. In Experiment 1, participants who were recruited for a real-effort task were paid either a low wage or a high wage. Half of the participants were aware of the income inequality, while the other half were not. After completing their task, they were invited to invest a part of their salary in a risky asset. In Experiment 2, we replicated the same experiment in the laboratory with windfall endowments to test the consistency of results in the laboratory settings. The results of the first experiment show that high-wage subjects take higher risks than low-wage participants do if they are aware of the inequality in wages. This finding supports the idea that income comparisons shape risky decisions. In Experiment 2, on the other hand, we did not observe any significant differences in decisions. This may suggest that the income comparison is sensitive to house-money effect.

Suggested Citation

  • Ulrich Schmidt & Levent Neyse & Milda Aleknonyte, 2019. "Income inequality and risk taking: the impact of social comparison information," Theory and Decision, Springer, vol. 87(3), pages 283-297, October.
    • Handle: RePEc:kap:theord:v:87:y:2019:i:3:d:10.1007_s11238-019-09713-8
    DOI: 10.1007/s11238-019-09713-8
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    4. Christian T. Elbæk & Panagiotis Mitkidis & Lene Aarøe & Tobias Otterbring, 2023. "Subjective socioeconomic status and income inequality are associated with self-reported morality across 67 countries," Nature Communications, Nature, vol. 14(1), pages 1-14, December.
    5. Eugenio Levi & Abhijit Ramalingam, 2023. "Absolute vs. relative poverty and wealth: Cooperation in the presence of between-group inequality," MUNI ECON Working Papers 2023-09, Masaryk University.
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    7. Brañas-Garza, Pablo & Molis, Elena & Neyse, Levent, 2021. "Exposure to inequality may cause under-provision of public goods: Experimental evidence," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 92(C).
    8. Flaviana Palmisano, 2024. "Compassion and envy in distributional comparisons," Theory and Decision, Springer, vol. 96(1), pages 153-184, February.
    9. Christian T. Elbaek & Ifeatu Uzodinma & Zilia Ismagilova & Panagiotis Mitkidis, 2022. "Suppetia ex machina: How can AI technologies aid financial decision-making of people with low socioeconomic status?," Journal of Behavioral Economics for Policy, Society for the Advancement of Behavioral Economics (SABE), vol. 6(S1), pages 49-57, July.

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