Risky choices and solidarity: disentangling different behavioural channels

Renate Strobl,Conny Wunsch

doi:10.1007/s10683-020-09694-4

Abstract

We investigate whether informal support is sensitive to the extent to which individuals can influence their income risk exposure by opting into risk. In a laboratory experiment with slum dwellers in Nairobi, we measure subjects’ transfers to a worse-off partner under both random assignment, and self-selection into a safe or risky project. Our experimental design allows us to discriminate between different possible explanations for why giving behaviour might change when risk exposure is self-selected. We find that solidary support is independent of the partners’ choice of risk exposure, which contradicts attributions of responsibility for neediness and ex-post choice egalitarianism. Instead, we find that support depends on donors’ risk preferences. Risk-takers seem to feel less obliged to share the profits they earn from their choices compared to subjects who earn equally high profits by pure luck. Our results have important implications for anti-poverty policies that aim at encouraging risky investments.

Highlights

Given that formal insurance markets in developing countries are very limited, poor households typically rely on the help of family or friends in times of economic hardship
This study investigates whether solidarity, which is a crucial base for informal insurance arrangements in developing countries, is sensitive to the extent to which individuals can influence their risk exposure
In contrast to previously conducted experiments that study similar questions, we use an experimental design that elicits preferred projects for all subjects. This allows us to separate the effect of CHOICE on fairness views from other differences across treatments and to discriminate between three different possible explanations for why giving behaviour might change when risk exposure is self-selected rather than exogenous

Summary

Introduction

Given that formal insurance markets in developing countries are very limited, poor households typically rely on the help of family or friends in times of economic hardship. Trhal and Radermacher (2009), Cettolin and Tausch (2015) and Akbas et al (2019) contrast the situation where subjects are exposed to exogenous income risk with the situation where subjects can choose freely between a risky and a safe(r) income option They find supporting evidence for the hypothesis that individuals are less generous towards those whose bad outcome is a result of their own risk-taking action compared to just bad luck. The countries in which the studies have been conducted have social security systems that considerably limit the extent to which individuals need to rely on other people’s solidarity Such public safety nets are absent in developing countries and mutual voluntary help is an essential risk-pooling source for households. When participants think that individuals are responsible for their behaviour (e.g. through smoking or low effort), the degree to which subjects

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