Heterogeneous Risk Preferences, Entrepreneurship, and Wealth

Brigitte Hochmuth, Monika Merz and Fabian Prettenthaler

No 22109, 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 Socio-Economic Panel (GSOEP), we estimate that a one-unit increase in risk aversion lowers the probability of a worker transitioning to self-employment by 17 percent. We develop a life-cycle model of occupational choice with Epstein-Zin preferences and heterogeneous risk attitudes to examine how risk aversion interacts with entrepreneurial ability and wealth in determining entry into self-employment, the survival probability upon entry, and its aggregate implications. Counterfactual simulations show that increasing business risk reduces entry and shifts the pool of entrepreneurs toward less risk-averse individuals. In contrast, Germany’s “1-Euro GmbH†reform of 2008 weakened the role of risk aversion for entry, drawing more risk-averse individuals into entrepreneurship with little change in their ability composition.

Keywords: Recursive utility; individual risk preferences; Occupational choice; business risk; Limited liability (search for similar items in EconPapers)
JEL-codes: E21 E24 J24 (search for similar items in EconPapers)
Date: 2026-10
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