Risk Preference and Entrepreneurial Investment at the Top of the Wealth Distribution

26 Pages Posted: 23 Dec 2020

See all articles by Frank M. Fossen

Frank M. Fossen

University of Nevada, Reno; IZA Institute of Labor Economics

Johannes Koenig

German Institute for Economic Research (DIW Berlin)

Carsten Schroeder

German Institute for Economic Research (DIW Berlin); Free University of Berlin (FUB) - Department of Business and Economics

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Abstract

We present first evidence how individual risk preferences shape entrepreneurial investment among the very wealthy using novel survey data from the top of the wealth distribution, which have been added to the 2019 German Socio-economic Panel Study. The data include private wealth balance sheets, in particular the value of own private business assets, and a standard measure of risk tolerance. We find that wealthy individuals are more likely to be entrepreneurs and invest a larger share of their wealth in their own businesses when they are more willing to take risks. These associations are stronger among wealthy than among less wealthy individuals. The results imply that policies affecting the riskiness of income and wealth, such as tax policy and bankruptcy law, affect risky investment decisions at the top of the wealth distribution in ways strongly determined by individual risk tolerance. Since the wealthy dominate aggregate risky investment, their risk preferences must be taken into account for theory development, empirical analysis, and policy evaluations.

JEL Classification: J22, J23, L26, D14

Suggested Citation

Fossen, Frank M. and Koenig, Johannes and Schroeder, Carsten, Risk Preference and Entrepreneurial Investment at the Top of the Wealth Distribution. IZA Discussion Paper No. 13951, Available at SSRN: https://ssrn.com/abstract=3751844 or http://dx.doi.org/10.2139/ssrn.3751844

Frank M. Fossen (Contact Author)

University of Nevada, Reno ( email )

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IZA Institute of Labor Economics

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Johannes Koenig

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

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Berlin, 10117
Germany

Carsten Schroeder

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

Mohrenstraße 58
Berlin, 10117
Germany

Free University of Berlin (FUB) - Department of Business and Economics ( email )

Boltzmannstrasse 20
D-14195 Berlin, 14195
Germany

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