Abstract
Not much is known about the heterogeneity of risk attitudes among poor households in rich countries. This paper provides estimates from a unique data set collected among the urban poor in Atlanta, Georgia. The data set includes lab-in-the-field experiments on the relationship between risk attitudes and several household characteristics. Apart from looking at income, wealth, and education, we are particularly interested in household composition as it captures the number and kind of people who are dependant on the income of the household head. Heads of households who are less risk averse may be willing to take on the extra risk from smaller resource margins resulting from additional dependants, implying a negative relationship between household size and risk aversion. However, if the size of the household is a result of exogenous forces some heads of households may become more risk averse with more dependants. Household size can also reflect a risk management choice that involves adding non-dependant members who can provide resources and risk sharing. However, this possibility is limited to homes that are not already too crowded. We find that household size correlates positively with the risk aversion of the head, but with a large proportion of children the correlation is strongly dampened. However, this negative effect of children is conditional on the home not already being crowded. These heterogeneous findings have implications for the design of new insurance, savings, and credit programs where risk attitudes are important to the decisions to adopt.
Highlights
A new perspective on poverty, as it relates to risk in income, resources, and needs has recently emerged
These studies expose the very complex risk management needs that poor households face due to the great variability in both income and spendings that they encounter on a daily basis
Experimenters know a lot about the heterogeneity of risk attitudes, but not so much as it pertains to poor households in rich countries
Summary
A new perspective on poverty, as it relates to risk in income, resources, and needs has recently emerged. Similar to how other studies associate lower incomes with higher risk aversion due to the reduced ability to manage risk, the reduction in resource margins that come with having more dependants lead to a reduction in the ability to manage risk. This increase in risk may lead to an increase in risk aversion, especially if the number of dependants is not an immediate choice by the household head, but a result of some other forces. Online appendices with additional information referred to throughout the paper are available at https://cear.gsu.edu/category/working-papers/wp-2021/ for working paper WP2021_03
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