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Risk Preference And Employment Contract Type

  • SARAH BROWN
  • LISA FARRELL
  • MARK N. HARRIS
  • JOHN G. SESSIONS

We consider three broad types of employment contract vis, self-employment, PRP, and fixed wage employment. We focus on the implied degree of income risk associated with each type of employment contract, arguing that such risk falls as we move from self-employment at one extreme to fixed wage employment at the other. We investigate the possibility that there is a systematic relationship between employment within a particular contract type and risk preference as proxied by expenditure on risky goods and goods associated with risk averse behaviour. A typical question might be: 'do self-employed individuals attempt to compensate for the relatively high level of income risk they face by reducing their expenditure on relatively risky goods? Or, do such individuals have a taste for risk which they express in both their working and non-working life?' Our empirical analysis, based on pooled cross-section data drawn from the British Family Expenditure Survey 1997-2000, provides evidence of a systematic relationship between employment contract type and risk preference, with, for example, self-employed workers being more (less) likely to engage in the consumption of "risky" (financial security) products. The results are based the Ordered Generalized Extreme Values model (OGEV), a relatively infrequently used discrete choice model, which importantly allows for ordering and correlation in the observed alternatives.

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Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 845.

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Length: 33 pages
Date of creation: 2002
Date of revision:
Handle: RePEc:mlb:wpaper:845
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