The measurement of transient poverty: Theory and application to Pakistan

The present paper investigates the measurement of transient poverty when each person's welfare level fluctuates due to exogenous risk. The paper namely characterizes the sensitivity of transient/chronic poverty decomposition with respect to the poverty line and to the expected welfare level so that the decomposition analysis will be based on solid theoretical foundations and be robust empirically. Theoretical results show that poverty measures associated with prudent risk preferences perform better than other measures in assuring that the value of transient poverty increases with the depth of chronic poverty and that the decomposition is not highly sensitive to the poverty line. Poverty measures such as those associated with constant relative risk aversion are thus superior to popular Foster–Greer–Thorbecke (FGT) measures such as headcount, poverty gap, and squared poverty gap indices. These theoretical arguments are confirmed empirically by the application of the decomposition to a two-period household panel dataset from rural Pakistan. The relative magnitudes of transient versus chronic poverty are more robust to changes in the poverty line when poverty measures associated with constant relative risk aversion are used than when FGT poverty measures are used.     

Psychophysical laws in risk theory

In this article specific hypotheses on the shape of a rational agent's risk preference function are derived from psychophysical laws. Weber's law is used to establish the hypothesis of constant relative risk aversion for a myopic expected-utility maximizer. Weber's law. Fechner's law and a modified version of Koopmans' preference functional are shown to generate a family of multiperiod preference functionals which are either of an additive logarithmic or a multiplicative Cobb-DougIas type. This family has very appealing implications in a world of stochastic constant returns to scale. For the actual decision the multiperiod optimizer exhibits constant relative risk aversion as does the myopic optimizer. However, with the passage of time. the degree of this risk aversion, in general, moves towards unity. Moreover, it is worth noting that the agent neither has to make the consumption decision simultaneously with the selection of an optimal risk project nor needs any information about the future except his or her own preferences.     

Ethnic ingroup friendships in schools: Testing the by-product hypothesis in England,Germany, the Netherlands and Sweden

This study set out to examine to what extent ethnic ingroup friendship in secondary school classes are a by-product of cultural and socioeconomic ingroup friendship. Based on homophily theory, we expected similar opinions, leisure activities, religion, risk behaviour and socioeconomic factors to (partly) explain ethnic ingroup preferences. Multilevel p₂ models on 13,272 pupils in 625 secondary school classes in England, Germany, the Netherlands and Sweden showed that adolescents tend to have friends similar in ethnicity, cultural and socioeconomic characteristics. We find no evidence, however, that ethnic homophily is explained by cultural and socioeconomic homophily.     

Risky choice in interpersonal context: Do people dare because they care?

This paper presents an experimental study investigating the interplay of individuals’ other-regarding preferences and individuals’ risk attitude. Participants (N = 120) had to make choices between a certain and risky payoff only for themselves (individual context) and choices in which the participants were paired with another randomly assigned participant who functioned as a passive recipient (interpersonal context). In the interpersonal context the risky option was beneficial for the other person while the certain option was not. Thus, the interpersonal choice context was an abstract representation of the incentive structure in helping situations, which yield risk only for the helper. Risky options in the interpersonal context yielded different payoff distributions, which allowed us to identify how considerations of fairness affect interpersonal risky choices. To assess other-regarding preferences, a dictator game was played. First we found that participants were generally less risk averse in the interpersonal choices; however, the degree of risk aversion was affected by the distribution of payoffs between decider and recipient. Furthermore, we found that changes of risk aversion in an interpersonal context could be predicted with the proposed splits in the dictator game.     

Are Risk Attitudes Fixed Factors or Fleeting Feelings?

We investigate the stability of measured risk attitudes over time, using a 13-year longitudinal sample of individuals in the National Longitudinal Survey of Youth 1979. We find that an individual’s risk aversion changes systematically in response to personal economic circumstances. Risk aversion increases with lengthening spells of employment and time out of labor force, and decreases with lengthening unemployment spells. However, the most important result is that the majority of the variation in risk aversion is due to changes in measured individual tastes over time and not to variation across individuals. These findings that measured risk preferences are endogenous and subject to substantial measurement errors suggest caution in interpreting coefficients in models relying on contemporaneous, one-time measures of risk preferences.     

REFERENCE‐DEPENDENT PREFERENCES,LOSS AVERSION,AND LIVE GAME ATTENDANCE

We develop a consumer choice model of live attendance at a sporting event with reference‐dependent preferences. The predictions of the model motivate the “uncertainty of outcome hypothesis” (UOH) as well as fans' desire to see upsets and to simply see the home team win games, depending on the importance of the reference‐dependent preferences and loss aversion. A critical review of previous empirical tests of the UOH reveals significant support for models with reference‐dependent preferences, but less support for the UOH. New empirical evidence from Major League Baseball supports the loss aversion version of the model. (JEL L83, D12)     

Choice set,relative income,and inequity aversion: An experimental investigation

Inequity aversion preference has been widely applied in interpretations of various economic behaviors. A rapidly growing literature has been attempting to measure the strength of inequity aversion preferences as accurately as possible. We vary two factors that might affect the accuracy of the measurement of inequity aversion preference, i.e., choice sets with different underlying inequity aversion strength ranges and with different relative income inequities while absolute income inequities remain fixed. We find that unidirectional changes in the choice sets for disadvantageous and advantageous inequity aversion preferences significantly bias the measured strength of both preferences in the same directions of the changes and that the variance in inequity aversion increases with the range of choice sets. Moreover, a decrease in relative income inequity raises the measured strength of advantageous inequity aversion but does not affect disadvantageous inequity aversion preference. Our results suggest controlling for choice sets and relative income inequity between players to improve the measurement accuracy of inequity aversion preference.     

Subjective measures of risk aversion, fixed costs, and portfolio choice

The paper investigates risk preferences among different types of individuals. We use several different measures of risk preferences, including questions on choices between uncertain income streams suggested by Barsky, Juster, Kimball, and Shapiro (1997) and a number of ad hoc measures. As in [Barsky et al., 1997] and [Arrondel and Calvo-Pardo, 2002], we first analyze individual variation in the risk aversion measures and explain them by background characteristics (both “objective” characteristics and other subjective measures of risk preference). Next we incorporate the measured risk preferences into a household portfolio allocation model, which explains portfolio shares, while accounting for incomplete portfolios and fixed costs. Our results show that a measure based on factor analysis of answers to a number of simple risk preference questions has the most explanatory power. The Barsky et al. (1997) measure has less explanatory power than this “a-theoretical” measure, suggesting that sophisticated measures based on economic theory may exceed the financial capability of respondents. Fixed costs turn out to provide an economically and statistically highly significant explanation for incomplete portfolios.     

Time-based versus money-based decision making under risk: An experimental investigation

This paper investigates whether individuals make similar decisions under risk when the outcomes are expressed in time versus monetary units. We address this issue in two studies measuring individual risk preferences and prospect theory parameters (i.e., utility curvature, probability weighting, and loss aversion) for both time and money. In the first (resp., second) study we consider relatively small (resp., large) time and monetary outcomes. We find that individuals hold similar risk preferences for time and money; we also find evidence that “time is money” with regard to the utility curvature for gains, loss aversion, and decision weighting. However, individuals have different valuations of losing time and money. The utility function for small losses of money is more concave and variable than the utility function for small losses of time (Study 1), but the utility function for large losses of time is more concave and variable than that for large losses of money (Study 2). We argue that these results reflect a difference in the perceived slack of the respective resource.     

RISK PREFERENCE ESTIMATION IN THE NONLINEAR MEAN STANDARD DEVIATION APPROACH

Risk preferences and technology are jointly estimated in the nonlinear mean-standard deviation framework for a competitive firm model under price risk. A utility function is proposed that nests various risk preference structures and risk neutrality as empirically refutable special cases. The empirical application using firm-level data finds evidence of decreasing absolute risk aversion, differences in the nature of relative risk aversion by firm size, and little support for the widely used linear mean-variance framework. The estimation results also show that ignoring risk and risk preferences can substantially overestimate output supply and input demand elasticities.     

Aversion to inequality in Italy and its determinants

The main goal of this paper is to estimate the preferences of the Italian society towards equity in order to verify whether preferences (i) have changed across the years, and (ii) can be related to specific socio-demographic characteristics. Introducing equity concerns in the implementation of economic policies is a fundamental problem faced by both economists and policy makers. This paper uses a social welfare function à la Jorgenson and Slesnick to estimate society’s aversion towards inequality by implementing a voting scheme for compiling individuals’ equity preferences into a social choice by majority rule. The results show that preferences are highly polarized toward a low and a high concern for equity aversion and that this concern is significantly related with several sociodemographic characteristics. Among them, income plays an important role with richer people tending to favor less equity. Results also show that preferences towards equity have changed across the years.     

Parenting is risky business: parental risk attitudes in small stakes decisions on behalf of their children

Parents often face risk when making decisions on behalf of their children, since outcomes may affect child development. We perform an incentive-compatible field experiment using the Holt and Laury (Am Econ Rev 92(5):1644–1655, 2002) design to elicit parental risk preferences in a stewardship decision framework. Multivariate analysis using different estimation techniques suggests that parents are significantly more risk-averse when deciding for their child than for themselves. Higher risk aversion is linked to characteristics of parents, not of children. Mood and gender of the deciding parent play a key role. If these results also hold for larger stakes, insights from this study could help to improve decision environments for parents to limit inequality between children due to diverging parental risk preferences.     

Alienation,indifference and the choice of ideological position

In this paper we describe a simple model of individual voting behavior and present its implications for the candidate positioning problem under both vote and plurality maximization. Under our assumptions, some voters at the extremes of the ideological spectrum typically will not vote because they are alienated by the equilibrium location of candidates. There will also be some voters in the middle of the ideological spectrum who will not vote because they are indifferent between the equilibrium locations of the candidates. Both the abstention from alienation and from indifference arise explicitly from utility maximization. Once we allow for alienation and indifference, the two alternative candidate objective functions (vote maximization and plurality maximization) yield different outcomes. In particular, we show that under vote maximization the Median Voter (or Minimum Differentiation) outcome will not arise. On the other hand, under plurality maximization, the Median Voter outcome may or may not hold, depending on the distribution of voter preferences.We should like to thank Jerry Fusselman, Jon Hamilton, Mel Hinich, Charlie Holt and participants at seminars at the University of Virginia, Northwestern University and the 1989 Meetings of the Public Choice Society and the Economic Science Association for their helpful comments.     

RISK PREFERENCES AND EXPECTED UTILITY: EVIDENCE FROM LABOR SUPPLY DATA

This paper adds to the growing body of evidence that observed risk preferences are not consistent with expected‐utility theory. Using the link between labor supply decisions and utility as outlined by Chetty (“A Bound on Risk Aversion Using Labor Supply Elasticities.” The American Economic Review, 96(5), 2006, 1821–34), I compute the curvature of utility over wealth for 3,900 individuals in the 1996 Panel Study of Income Dynamics. I then compare this estimate to a measure of relative risk aversion based on the respondents' answers to hypothetical gambling questions and find virtually zero correlation. Finally, I investigate how the two measures and their correlations change by demographic groups and risky behavior. (JEL C81, D80, J22)     

Sex hormones and choice under risk

We study the correlation of choice under risk in Holt–Laury lotteries for gains and losses with gender, the use of hormonal contraceptives, menstrual cycle information, salivary testosterone, estradiol, progesterone, and cortisol as well as the digit ratio (2D:4D; length of the index finger to the ring finger of the right hand) in more than 200 subjects (45% females). In males, salivary testosterone is negatively correlated with risk aversion for gains only. In females, salivary cortisol is positively correlated with risk aversion for gains only. No other significant correlations between risk preferences and salivary hormones are observed. No significant correlations between risk preferences and the menstrual cycle are observed in naturally cycling females. No significant correlations between risk preferences and the digit ratio are observed in either gender and/or race.     

SALARIES OR PIECE RATES: ON THE ENDOGENOUS MATCHING OF HARVEST WORKERS AND CROPS

The objective of this paper is to determine whether the choice of payment schemes (hourly vs. piece rates) is systematically related to the workers' risk aversion and ability. We derive the equilibrium relationship between agents' risk aversion and ability and the power of incentives (payment scheme) in a market where many heterogeneous principals and agents are endogenously matched. The equilibrium matching between principals and agents depends on the traits and is critical in determining the contract choice. Using confidential data from the National Agricultural Workers Survey (NAWS), we find evidence of matching between agricultural workers and the riskiness of their jobs (crops they harvest) based on workers' risk aversion and no matching based on ability. When controlling for matching, we find strong evidence that high risk‐averse workers choose hourly rates and low risk‐averse workers choose piece rates. We also found that high ability types choose piece rates and low ability types choose hourly rates but the evidence is weaker. (JEL J33, D82, Q12)     

TRANSACTION RISK AND BIDDING BEHAVIOR

This paper analyzes a model of consumer behavior where transaction risk in the form of a divergence between bid and executed demand is incorporated into the consumer's decision process. A neutral assumption concerning risk preferences, combined with income and expenditure constraints, is shown to be sufficient to generate behavior commonly associated with risk aversion. Such responses to transaction risk are referred to as objective reactions as opposed to subjective attitudes toward risk. The income effect is shown to play an important role in determining behavioral reactions to this type of risk.     

Family Financial Risk Taking When the Wife Earns More

This study investigates whether the relative bargaining power of spouses plays a role in explaining household financial risk taking. Traditional models assume that household decisions are made based on pooled resources and common preferences. In contrast, bargaining models hypothesize that household decisions depend on the relative bargaining power of spouses. According to bargaining models, if women are more risk averse, then households should exhibit less financial risk taking as the bargaining power of the wife increases. Results of an analysis of household financial risk taking in a sample of dual-earner, married households from the 2004 Survey of Consumer Finances are more consistent with decision making based on pooled resources rather than on the relative bargaining power of spouses.

Interpersonal risk assessment and social preferences: An experimental study

We investigate interpersonal risk assessment, that is how individuals use either their own or their partner’s monetary resources to offset the risk that affects them or their partner. The observed behavior is in line with the predictions of a simple piecewise linear model of social preferences. Overall, individuals opportunistically draw from others’ resources to offset risk; furthermore, they display higher levels of risk aversion when delegated to choose for others rather than when choosing for themselves. However, different social types differ in the assessment of interpersonal risk. Considering our results, we suggest that studies dealing with interpersonal risk assessment should not only focus on risk preferences, but also take into account social preferences.