Inequality and Risk Preference

Harry Pickard, Thomas Dohmen and Bert Van Landeghem

No 15854, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: income inequality; risk preference; risk sensitivity (search for similar items in EconPapers)
JEL-codes: D01 D81 D91 O15 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2023-01
New Economics Papers: this item is included in nep-dcm, nep-ltv and nep-rmg
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Published - [This version: February 2024] published in: Journal of Risk and Uncertainty, 2024, 69, 191 - 217

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Related works:
Journal Article: Inequality and risk preference (2024)
Working Paper: Inequality and Risk Preference (2023)
Working Paper: Inequality and risk preference (2022)
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