Abstract
The relationship between risk in the environment, risk aversion and inequality aversion is not well understood. Theories of fairness have typically assumed that pie sizes are known ex-ante. Pie sizes are, however, rarely known ex ante. Using two simple allocation problems—the Dictator and Ultimatum game—we explore whether, and how exactly, unknown pie sizes with varying degrees of risk (“endowment risk”) influence individual behavior. We derive theoretical predictions for these games using utility functions that capture additively separable constant relative risk aversion and inequity aversion. We experimentally test the theoretical predictions using two subject pools: students of Czech Technical University and employees of Prague City Hall. We find that: (1) Those who are more risk-averse are also more inequality-averse in the Dictator game (and also in the Ultimatum game but there not statistically significantly so) in that they give more; (2) Using the within-subject feature of our design, and in line with our theoretical prediction, varying risk does not influence behavior in the Dictator game, but does so in the Ultimatum game (contradicting our theoretical prediction for that game); (3) Using the within-subject feature of our design, subjects tend to make inconsistent decisions across games; this is true on the level of individuals as well as in the aggregate. This latter finding contradicts the evidence in Blanco et al. (2011); (4) There are no subject-pool differences once we control for the elicited risk attitude and demographic variables that we collect.
Highlights
The relationship between risk aversion and inequality aversion is not well understood
Ferrer-i-Carbonell & Ramos [3] use German survey data and Carlsson et al [4] use non-incentivized choices between imagined societies and lotteries to show that risk aversion and inequality aversion are positively related
Experimental evidence suggests that the degree of risk aversion is heavily dependent on the non-hypothetical nature of the task(s), and the scale of financial stakes used (e.g., Holt & Laury [5]; Harrison et al [6])
Summary
The relationship between risk aversion and inequality aversion is not well understood. We can test the relationship between risk aversion and inequality aversion by analyzing subjects’ choices in Dictator and Ultimatum games. The world, is rarely known ex ante, and so risk in the environment and risk preferences may play an important role in influencing fairness and reciprocity It remains an open question if choices in different games, and for each game under different degrees of risk, are consistent. We study the relationship between risk aversion and inequality aversion using properly incentivized Dictator and Ultimatum games, with varying degrees of risk (“endowment risk”).. We use a within-subject design and the elicited risk preferences to explore whether choices under different degrees of risk (within the same game) are consistent. The Appendix contains simulations, an overview of the socio-demographic characteristics of our subjects, and a copy of the (translated) instructions and the precise sequencing of the scenarios used in the experiment
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