Risk preferences and economic behavior: Experimental investigations in the field

• Applicant: Professor Dr. Ferdinand Vieider
• Subject Area: Economic Theory ; Empirical Social Research
• Term: from 2013 to 2018
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 239295954

In this application we present a research program that will allow us to address some central issues on how risk attitudes are determined and transmitted, as well as their correlation to other preferences and economic behavior. Recent investigations of risk attitudes with large general population samples have brought many new insights, as well as raising interesting new questions. We propose to address several of these issues in a panel that we have the opportunity to build up in rural India. In collaboration with the Environmental Defense Fund, an NGO promoting emission reductions that go hand in hand with development programs, we want to follow 3000 households over several years. This will allow us to address several issues that are currently only poorly understood. Risk attitudes seem to be transmitted within the family, and significant correlations have been found in the risk attitudes of parents and children, as well as between spouses. It remains, however, to be addressed how this transmission works, and especially what determines the tight association in risk attitudes between spouses. Taking measurements of risk attitudes with several family members repeatedly will allow us to determine transmission mechanisms, as well as the influence of external circumstances on such mechanisms. We are particularly interested in the relationship between risk aversion and income. Several studies in both the developed and the developing world have found risk aversion to decline in income. The causality behind this correlation is, however, not well understood. We can use the large idiosyncratic income shocks caused by random fluctuations in the monsoon to get at the heart of the causality issue. Collecting data on risk management and planting strategies will allow us to determine the extent to which risk aversion contributes to poverty. Observing the incidence of income shocks on subsequent measurements of risk attitudes as well as real world behavior will reveal whether there is a direct effect of income on risk aversion. In addition, we want to measure time preferences and trust. On the one hand, this will allow us to look at the relations between risk attitudes, trust attitudes, and time preferences. On the other hand, we will try and relate the different kinds of preferences to the actual economic behavior of the households. We will also allocate households to treatments on several issues. On the one hand, we plan to offer households crop insurance, and try to improve existing instruments based on our insights on preferences and economic activity. On the other, we can open savings accounts for households, and determine how such saving accounts will be best used as a means to smooth consumption. All in all, this is meant to result in an integrated program that provides insights into several scientific issues that are so far unresolved or only partially known, while at the same time helping to lift poor rural households out of poverty.

• DFG Programme: Research Grants
• International Connection: France, Sweden
• Participating Persons: Professor Dr. Mohammed Abdellaoui, Ph.D.; Professor Dr. Peter Martinsson; Marta Serra-Garcia, Ph.D.