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On The Preferences of Principals and Agents

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  • Marco Castillo
  • Ragan Petrie
  • Maximo Torero

Abstract

One of the reasons why market economies are able to thrive is that they exploit the willingness of entrepreneurs to take risks that laborers might prefer to avoid. Markets work because they remunerate good judgement and punish mistakes. Indeed, modern contract theory is based on the assumption that principals are less risk averse than agents. We investigate if the risk preferences of entrepreneurs are different from those of laborers by implementing experiments with a random sample of the population in a fast-growing, small-manufacturing, economic cluster. As assumed by theory, we find that entrepreneurs are more likely to take risks than hired managers. These results are robust to the inclusion of a series of controls. This lends support to the idea that risk preferences are an important determinant of selection into occupations. Finally, our lotteries are good predictors of financial decisions, thus giving support to the external validity of our risk measures and experimental methods.

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Bibliographic Info

Paper provided by Experimental Economics Center, Andrew Young School of Policy Studies, Georgia State University in its series Experimental Economics Center Working Paper Series with number 2007-12.

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Length: 16
Date of creation: Dec 2007
Date of revision:
Handle: RePEc:exc:wpaper:2007-12

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Cited by:
  1. Hill, Ruth Vargas & Maruyama, Eduardo & Viceisza, Angelino, 2010. "Breaking the norm: An empirical investigation into the unraveling of good behavior," IFPRI discussion papers 948, International Food Policy Research Institute (IFPRI).
  2. Couture, St├ęphane & Reynaud, Arnaud, 2010. "Stability of Risk Preference Measures: Results from a Field Experiment on French Farmers," TSE Working Papers 10-151, Toulouse School of Economics (TSE).
  3. Pushkar Maitra & Subha Mani, 2012. "Learning and Earning: Evidence from a Randomized Evaluation in India," Monash Economics Working Papers 44-12, Monash University, Department of Economics.
  4. Dasgupta, Utteeyo & Gangadharan, Lata & Maitra, Pushkar & Mani, Subha & Subramanian, Samyukta, 2011. "Selection into skill accumulation: evidence using observational and experimental data," MPRA Paper 32383, University Library of Munich, Germany.
  5. Utteeyo Dasgupta & Subha Mani & Lata Gangadharan & Pushkar Maitra & Samyukta Subramanian, 2012. "Choosing to be Trained: Evidence from a Field Experiment," Fordham Economics Discussion Paper Series dp2012_01, Fordham University, Department of Economics.
  6. Castillo, Marco & Ferraro, Paul J. & Jordan, Jeffrey L. & Petrie, Ragan, 2011. "The today and tomorrow of kids: Time preferences and educational outcomes of children," Journal of Public Economics, Elsevier, vol. 95(11), pages 1377-1385.

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