Preferences in the case of risk and financial difficulties in the poorest households

David Crainich, Louis Eeckhoudt (louis.eeckhoudt@fucam.ac.be) and Véronique Flambard

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Abstract: A better understanding of the factors influencing payment difficulties encountered by households is an important economic issue given the prevalence and the impact of such difficulties. The aim of the article is to determine whether the preferences of individuals faced with that risk alter their likelihood of being able to cope with payment difficulties. We first analyse the mechanisms through which the transition between the attitude faced with risk and the financial difficulties operates. This starts from the finding that the future wealth of a household is random. We establish the link between the dispersion of its distribution and the probability of defaulting on payments. We then show how decisions (insurance, prevention, portfolio and savings management) influenced by attitude with respect to risk can reduce that probability. Secondly, we verify empirically the influence of attitude to risk on payment difficulties. Given that financial difficulties are found more frequently in people who are the most economically disadvantaged, our work focuses on those households living below the poverty line (defined as 60% of the median standard of living of the population). On the basis of the 2010 Wealth survey and of the choice of lotteries proposed by Barsky et al. (1997), we classify households according to their preferences faced with the risk. Using a probit model, we evidence the significant effect of attitude in relation to risk, of age, of education, of the family situation and of the anticipation of future variations in income on the probability that a poor household will encounter financial difficulties. We thus show that those households with a greater relative risk aversion are less likely to cope with such difficulties.

Keywords: Risk Attitudes; Financial difficulties (search for similar items in EconPapers)
Date: 2014-12-18
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Published in Economie et Statistique / Economics and Statistics, 2014, 472-473, pp.195-211

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04511133

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