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Are You Risk Averse Over Other People’s Money?

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Author Info
Chakravarty Sujoy
Harrison Glenn W
Haruvy Ernan E
Rutstrom Elisabet E

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Abstract

Abstract. Decisions with uncertain outcomes are often made by one party in settingswhere another party bears the consequences. Whenever an agent is delegated tomake decisions that affect others, such as in the typical corporate structure, does theagent make decisions that reflect the risk preferences of the principal? We examinethis question in the simplest possible setting using controlled laboratory experiments.We find a remarkable result: when an individual makes a decision for an anonymousstranger, he tends to exhibit less risk aversion. This reduction is relative to his ownpreferences, and also relative to his belief about the other’s preferences. This resulthas significant implications for the design of contracts between principals and agents.

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Publisher Info
Paper provided by Indian Institute of Management Ahmedabad, Research and Publication Department in its series IIMA Working Papers with number 2005-08-04.

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Length: 29
Date of creation: 16 Aug 2005
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Handle: RePEc:iim:iimawp:2005-08-04

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Matthew Rabin & Richard H. Thaler, 2001. "Anomalies: Risk Aversion," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 219-232, Winter. [Downloadable!] (restricted)
  2. Glenn W. Harrison & Eric Johnson & Melayne M. McInnes & E. Elisabet Rutstrom, 2005. "Risk Aversion and Incentive Effects: Comment," American Economic Review, American Economic Association, vol. 95(3), pages 897-901, June. [Downloadable!]
  3. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January. [Downloadable!] (restricted)
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  4. Jeffrey M. Wooldridge, 2003. "Cluster-Sample Methods in Applied Econometrics," American Economic Review, American Economic Association, vol. 93(2), pages 133-138, May. [Downloadable!]
  5. Charles A. Holt & Susan K. Laury, 2005. "Risk Aversion and Incentive Effects: New Data without Order Effects," American Economic Review, American Economic Association, vol. 95(3), pages 902-912, June. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Sujoy Chakravarty & Jaideep Roy, 2009. "Recursive expected utility and the separation of attitudes towards risk and ambiguity: an experimental study," Theory and Decision, Springer, vol. 66(3), pages 199-228, March. [Downloadable!] (restricted)
  2. Chakravarty Sujoy & Roy Jaideep, 2006. "Risk, Ambiguity - Gains, Losses," IIMA Working Papers 2006-02-06, Indian Institute of Management Ahmedabad, Research and Publication Department. [Downloadable!]
  3. Dinky Daruvala, 2007. "Gender, risk and stereotypes," Journal of Risk and Uncertainty, Springer, vol. 35(3), pages 265-283, December. [Downloadable!] (restricted)
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