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Are You Risk Averse over Other People's Money?

  • Sujoy Chakravarty

    ()

    (Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Mehrauli Road, New Delhi, India 110067)

  • Glenn W. Harrison

    ()

    (Department of Risk Management & Insurance and Center for the Economic Analysis of Risk, Robinson College of Business, Georgia State University, P.O. Box 4036, Atlanta, GA 30302-4036, USA)

  • Ernan E. Haruvy

    ()

    (Department of Marketing, School of Management, University of Texas at Dallas SM 42, 800 West Campbell Road, Richardson, TX 75080-3021, USA)

  • E. Elisabet Rutström

    ()

    (§Robinson College of Business and Department of Economics, Andrew Young School of Policy Studies, Georgia State University, Atlanta GA 30302, USA)

Decisions with uncertain outcomes are often made by one party in settings where another party bears the consequences. Whenever an individual is delegated to make decisions that affect others, such as in the typical corporate structure, does the individual make decisions that reflect the risk preferences of the party bearing the consequences? We examine this question in two simple settings, lottery choices and sealed-bid auctions, using controlled laboratory experiments. We find that when an individual makes a decision for an anonymous stranger, there is a tendency to exhibit less risk aversion. This reduction in risk aversion is relative to his or her own preferences, and it is also relative to his or her belief about the preferences of others. This result has significant implications for the design of contracts between principals and agents.

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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 77 (2011)
Issue (Month): 4 (April)
Pages: 901-913

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Handle: RePEc:sej:ancoec:v:77:4:y:2011:p:901-913
Contact details of provider: Web page: http://www.southerneconomic.org/

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