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Preferences for Intrinsically Risky Attributes

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  • Zack Dorner
  • Daniel A. Brent
  • Anke Leroux

Abstract

Riskiness is an important attribute of goods, whereby the utility derived from that attribute is determined by one’s attitude to risk. We develop a novel approach to leverage data on risk attitudes from a fully incentivized risk elicitation task to model intrinsic riskiness of alternatives in a choice experiment. In a door-to-door survey, 981 respondents participated in a discrete choice experiment to elicit preferences over alternative sources of municipal water, conditional on water price and quality. Additional source attributes, such as the risk associated with vulnerability to drought or technological risks are treated as intrinsic since they cannot be plausibly disassociated from the water supply source. A risk task estimates participants’ coefficient of constant relative risk aversion (CRRA), which is incorporated into the preference estimation to test the hypotheses that supply risk and new technology risk are important intrinsic attributes for new water sources. Participants are not given information about supply or technological risks of the sources to avoid framing effects driving the results. Controlling for water quality and cost, we find that supply risk – and not technology risk – is an important determinant of participants’ choices.

Suggested Citation

  • Zack Dorner & Daniel A. Brent & Anke Leroux, 2016. "Preferences for Intrinsically Risky Attributes," Monash Economics Working Papers 32-16, Monash University, Department of Economics.
  • Handle: RePEc:mos:moswps:2016-32
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    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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