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Risk preference and entrepreneurial investment at the top of the wealth distribution

Author

Listed:
  • Frank M. Fossen

    (University of Nevada-Reno
    IZA)

  • Johannes König

    (DIW Berlin)

  • Carsten Schröder

    (DIW Berlin
    Freie Universität Berlin)

Abstract

We present evidence on how individual risk preferences are related to entrepreneurial investment among the wealthy. To do so, we use novel survey data from the top of the wealth distribution, which have been fully integrated into the 2019 German Socio-economic Panel Study. The data include private wealth balance sheets, in particular the value of own private business assets, and a standard measure of risk tolerance. We find that wealthy individuals are more likely to be entrepreneurs and invest a larger share of their wealth in their own businesses when they are more willing to take risks. A comparison with less wealthy individuals reveals that these associations are stronger among the wealthy. Since the wealthy dominate aggregate risky investment, their extraordinarily high preference for risk and its link to entrepreneurial activity should be taken into account in theory development, empirical analysis, and the design of public policies influencing the riskiness of income and wealth such as progressive taxation.

Suggested Citation

  • Frank M. Fossen & Johannes König & Carsten Schröder, 2024. "Risk preference and entrepreneurial investment at the top of the wealth distribution," Empirical Economics, Springer, vol. 66(2), pages 735-761, February.
    • Handle: RePEc:spr:empeco:v:66:y:2024:i:2:d:10.1007_s00181-023-02475-x
    DOI: 10.1007/s00181-023-02475-x
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    Cited by:

    1. Johannes König & Maximilian Longmuir, 2021. "Wage Risk and Portfolio Choice: The Role of Correlated Returns," Discussion Papers of DIW Berlin 1974, DIW Berlin, German Institute for Economic Research.
    2. Fischbacher, Urs & Neyse, Levent & Richter, David & Schröder, Carsten, 2022. "Adding household surveys to the behavioral economics toolbox: Insights from the SOEP Innovation Sample," Discussion Papers, Research Unit: Market Behavior SP II 2022-201, WZB Berlin Social Science Center.

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    More about this item

    Keywords

    Risk; Wealth; Entrepreneurship; Portfolio choice;
    All these keywords.

    JEL classification:

    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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