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Inequality and Risk Preference

Author

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  • Pickard, Harry

    (Newcastle University)

  • Dohmen, Thomas

    (University of Bonn and IZA)

  • van Landeghem, Bert

    (University of Sheffield)

Abstract

This paper studies the relationship between income inequality and risk taking. Increased income inequality is likely to enlarge the scope for upward comparisons and, in the presence of reference-dependent preferences, to increase willingness to take risks. Using a globally representative dataset on risk preference in 76 countries, we empirically document that the distribution of income in a country has a positive and significant link with the preference for risk. This relationship is remarkably precise and holds across countries and individuals, as well as alternate measures of inequality. We find evidence that individuals who are more able to understand inequality and individuals who fall behind their inherent point of reference increase their preference for risk. Two complementary instrumental variable approaches support a causal interpretation of our results.

Suggested Citation

  • Pickard, Harry & Dohmen, Thomas & van Landeghem, Bert, 2023. "Inequality and Risk Preference," IZA Discussion Papers 15854, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp15854
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    Cited by:

    1. Pak, Tae-Young, 2023. "Relative deprivation and financial risk taking✰," Finance Research Letters, Elsevier, vol. 55(PA).

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    More about this item

    Keywords

    risk sensitivity; risk preference; income inequality;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • O15 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Economic Development: Human Resources; Human Development; Income Distribution; Migration
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles

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