The Effect of a Major Pandemic on Risk Preferences - Evidence from Exposure to COVID-19

43 Pages Posted: 5 Nov 2020

See all articles by Daniel Graeber

Daniel Graeber

DIW Berlin; University of Potsdam - Economics and Social Sciences

Ulrich Schmidt

Kiel Institute for the World Economy

Carsten Schroeder

German Institute for Economic Research (DIW Berlin)

Johannes Seebauer

German Institute for Economic Research (DIW Berlin); Free University Berlin

Date Written: November 3, 2020

Abstract

The present paper studies the effect of the COVID-19 pandemic on risk preferences. Using real-time panel data from the year before the pandemic and from the first few months of the pandemic in Germany (April to July 2020), we provide robust evidence that exposure to COVID-19 reduces individual risk tolerance. We establish a causal link between the pandemic and risk tolerance by exploiting longitudinal and regional variation in infection rates. Our analysis shows that increased risk aversion can be observed in particular among better educated and more affluent respondents.

We further provide suggestive evidence that economic concerns, health concerns, and self-reported health partially mediate the relationship of interest.

Keywords: Risk preferences, COVID-19, infection rate, representative real-time survey data, natural experiment

JEL Classification: D81, I10, I12

Suggested Citation

Graeber, Daniel and Schmidt, Ulrich and Schroeder, Carsten and Seebauer, Johannes, The Effect of a Major Pandemic on Risk Preferences - Evidence from Exposure to COVID-19 (November 3, 2020). Available at SSRN: https://ssrn.com/abstract=3724461 or http://dx.doi.org/10.2139/ssrn.3724461

Daniel Graeber

DIW Berlin ( email )

DIW Berlin
Berlin, Berlin 14191
Germany

University of Potsdam - Economics and Social Sciences ( email )

Potsdam
Germany

Ulrich Schmidt

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, Schleswig-Hosltein D-24100
Germany

Carsten Schroeder (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Johannes Seebauer

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Free University Berlin ( email )

Germany

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