Attitudes Towards Large Income Risk in Welfare States: An International Comparison

62 Pages Posted: 19 Dec 2017

See all articles by Fred Schroyen

Fred Schroyen

Norwegian School of Economics (NHH) - Department of Economics

Karl O. Aarbu

Vesta Forsikring AS

Multiple version iconThere are 2 versions of this paper

Date Written: December 5, 2017

Abstract

Using survey data and the instrument developed by Barsky et al. (1997), we estimate the distribution of attitudes towards income risk in a country where many employment and health-related risks are generously covered by a tax financed social insurance system (Norway 2006). Under a CRRA assumption, the sample average for the coefficient of relative risk aversion is 3.8 with a standard deviation of 2.3. This number is then contrasted to that for five other OECD countries where risk attitudes have been measured using the same instrument and also prior to the financial crisis: Chile, France, Italy, The Netherlands and the US. When we relate this distribution for stated relative risk aversion to that for generosity of social insurance and the risks related to employment and Health expenditure, a picture emerges suggesting that more extensive welfare states induce higher risk tolerance for foreground risks-a-relationship that is in line with the theory on risk vulnerability.

Keywords: Risk Aversion; Stated Preferences; Income Lotteries; Background Risk

JEL Classification: D12; D81

Suggested Citation

Schroyen, Fred and Aarbu, Karl O., Attitudes Towards Large Income Risk in Welfare States: An International Comparison (December 5, 2017). NHH Dept. of Economics Discussion Paper No. 20/2017. Available at SSRN: https://ssrn.com/abstract=3089690 or http://dx.doi.org/10.2139/ssrn.3089690

Fred Schroyen (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

Karl O. Aarbu

Vesta Forsikring AS ( email )

Folke Bernadottes vei 50
N-5020 Bergen
Norway

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