RISK PREFERENCE AND EMPLOYMENT CONTRACT TYPE

Sarah Brown (), Lisa Farrell (), Mark Harris and John Sessions ()

No 845, Department of Economics - Working Papers Series from The University of Melbourne

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.

Keywords: Risk Preference; Self-Employment; Performance Related Pay; Ordered Alternatives; OGEV model (search for similar items in EconPapers)
JEL-codes: J20 J23 J24 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Risk preference and employment contract type (2006)
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