Risk aversion when preferences are altruistic

Abstract

We link risk preferences, as measured by the coefficient of relative risk aversion, with the prevalence and intensity of altruism, which we operationalize by the propensity of a person to voluntarily transfer part of his wealth to another person. To quantify the intensity of altruism, we incorporate a coefficient αi∈(0,1) in the utility function of an altruistic person i. This coefficient measures the extent to which the altruistic person derives utility from the wellbeing of another person. We show that an altruistic person who is an active donor (benefactor) is more risk averse than a non-altruistic person, and that the relative risk aversion of altruistic person i is an increasing function of αi. In addition, we show, in line with intuition, that person j who is the beneficiary of an altruistic transfer is less risk averse than a comparable person who is not a beneficiary of an altruistic transfer, and that the relative risk aversion of person j is a decreasing function of αi. When we analyze a setting in which two persons are altruistic towards each other, we find that, in essence, the risk aversion consequences of mutual altruism do not differ from the risk aversion consequences of unilateral altruism.