Heterogeneous Risk Preferences, Entrepreneurship, and Wealth

Brigitte Hochmuth, Monika Merz and Fabian Prettenthaler

No 20286, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper studies how individual risk attitudes shape occupational choice and wealth accumulation. Using self-reported individual risk preferences from the German Socioeconomic Panel (GSOEP), we estimate that an increase in risk tolerance raises the probability of a worker transitioning to self-employment. We also develop a life-cycle model of occupational choice with Epstein-Zin preferences and heterogeneous risk attitudes to study how risk aversion interacts with entrepreneurial ability and wealth in determining entry into self-employment and its aggregate implications. Counterfactual simulations show that increasing business risk reduces entry but improves selection by entrepreneurial skills. In contrast, Germany’s “1-Euro GmbH†reform of 2008 weakened the role of risk tolerance for entry and increased participation by more risk-averse individuals.

Keywords: Recursive; utility (search for similar items in EconPapers)
JEL-codes: E21 E24 J24 (search for similar items in EconPapers)
Date: 2025-05
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