Experimental Studies on Risk, Inequality and Relative Standing

Abstract

This thesis consists of four separate experimental studies that concern individuals’ preferences and choices on issues of risk, inequality and relative standing. In the first paper, individuals' aversion to risk and inequality, and their concern for relative standing, are measured through experimental choices between hypothetical societies. It is found that, on average, that individuals are both fairly inequality-averse and have a strong concern for relative income. The results are used to illustrate welfare consequences based on a utilitarian SWF and a modified CRRA utility function. It is shown that the social marginal utility of income may then become negative, even at income levels that are far from extreme. The second paper measures individuals’ preferences for risk and inequality using choices between imagined societies and lotteries. Most of the respondents in the study are found to be individually inequality averse, reflecting a willingness to pay for living in a more equal society. Left-wing voters and women are both more risk and inequality averse than others. The model allows for non-monotonic SWFs, implying that welfare may decrease with an individual’s income at high income levels, which is illustrated in simulations based on the empirical results. The third paper tests the relative performance of some of the competing social preference models have been developed inspired by the evidence from economic experiments. This is done using an experimental design that is aimed at capturing pure distributional concerns in a multi-person setting. We find that the individuals in this study are heterogeneous and that they do not follow any single notion of fairness or inequality aversion. In addition, the results suggest that efficiency concerns are not confined to students of economics but are important to students of all disciplines. The fourth paper reports results from an economic experiment where respondents are asked to make choices between risky outcomes for themselves and others. In addition, we elicit information about the respondents’ perception of others risk preferences. We investigate whether subjects’ own risk preferences and gender stereotypes are reflected in the prediction they make for the risk preferences of others and the way this occurs. We find no significant difference in risk preferences between men and women in the experiment. However, both men and women perceive women to be more risk averse than men. When predicting other people’s risk preferences, the respondents tend to use a combination of their own risk preferences and stereotypes. Moreover, when making risky choices for others, the respondents generally use a combination of their own risk preferences and their average predicted risk preference of the targeted group.