A friend is a treasure: On the interplay of social distance and monetary incentives when risk is taken on behalf of others

We study decision making on behalf of others where the profit maximizing choice is to take no risk. We investigate the effect of introducing or not monetary incentives for the decision maker (i.e. whether the decision maker’s payment is fixed or variable, in other words if it depends or not on the outcome of the investment)in the presence of different levels of social distance (i.e., whether the person affected by one’s decision is an unknown stranger or a friend) between who makes the decision and who is affected by it. In our setting, we find that monetary incentives do not vary the level of risk taking by the decision makers. When controlling for expected profit maximizer individuals (i.e. those who always invest zero irrespectively of the identity of the person affected by the decision), we find that variable payment leads to an increase in risk taking compared to fixed payment. Social distance reduces risk taking, increasing the expected payoff of the person affected by the decision; notably this is true irrespective of monetary incentive suggesting that social distance plays a major role in the decision making process on behalf of others.