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Inequality and risk preference

Author

Listed:
  • Harry Pickard

    (: Newcastle University Business School, Newcastle University, United Kingdom)

  • Thomas Dohmen

    (Economics Department, University of Bonn, Germany)

  • Bert Van Landeghem

    (Department of Economics, University of Sheffield, S1 4DT, UK)

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

  • Harry Pickard & Thomas Dohmen & Bert Van Landeghem, 2022. "Inequality and risk preference," Working Papers 2022022, The University of Sheffield, Department of Economics.
    • Handle: RePEc:shf:wpaper:2022022
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    File URL: https://www.sheffield.ac.uk/economics/research/serps
    File Function: First version, December 2022
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    Cited by:

    1. Pak, Tae-Young, 2023. "Relative deprivation and financial risk takingāœ°," Finance Research Letters, Elsevier, vol. 55(PA).
    2. Kibris, Arzu & Pickard, Harry & Uler, Neslihan, 2024. "The impact of exposure to armed conflict on altruistic and parochial preferences," QAPEC Discussion Papers 24, Quantitative and Analytical Political Economy Research Centre.

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    Keywords

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    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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