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Risk Preference And Employment Contract Type

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

Abstract

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.

Suggested Citation

  • Sarah Brown & Lisa Farrell & Mark N. Harris & John G. Sessions, 2002. "Risk Preference And Employment Contract Type," Department of Economics - Working Papers Series 845, The University of Melbourne.
  • Handle: RePEc:mlb:wpaper:845
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    6. Sarah Brown & Michael Dietrich & Aurora Ortiz Nuñez & Karl Taylor, 2013. "Business ownership and attitudes towards risk," Applied Economics, Taylor & Francis Journals, vol. 45(13), pages 1731-1740, May.
    7. Sarah Brown & Michael Dietrich & Aurora Ortiz & Karl Taylor, 2007. "Self-Employment and Risk Preference," Working Papers 2007008, The University of Sheffield, Department of Economics.
    8. Di Mauro, Carmela & Musumeci, Rosy, 2011. "Linking risk aversion and type of employment," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 40(5), pages 490-495.
    9. Krčál, Ondřej & Staněk, Rostislav & Slanicay, Martin, 2019. "Made for the job or by the job? A lab-in-the-field experiment with firefighters," Research in Economics, Elsevier, vol. 73(4), pages 271-276.
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    11. Colin P. Green & John S. Heywood, 2011. "Profit Sharing, Separation and Training," British Journal of Industrial Relations, London School of Economics, vol. 49(4), pages 623-642, December.
    12. Brown, Sarah & Dietrich, Michael & Ortiz-Nuñez, Aurora & Taylor, Karl, 2011. "Self-employment and attitudes towards risk: Timing and unobserved heterogeneity," Journal of Economic Psychology, Elsevier, vol. 32(3), pages 425-433, June.
    13. Simon Parker, 2007. "Which firms do the entrepreneurs come from?," Economics Bulletin, AccessEcon, vol. 10(10), pages 1-9.
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    More about this item

    Keywords

    Risk Preference; Self-Employment; Performance Related Pay; Ordered Alternatives; OGEV model;
    All these keywords.

    JEL classification:

    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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