This work was completed while Castillo and Petrie were on leave at the University of Pittsburgh. We are grateful to Lise Vesterlund and the Economics Department for their hospitality and to Lise Vesterlund for her helpful comments. We also thank the editor and two anonymous referees for comments that helped to improve the paper.
ON THE PREFERENCES OF PRINCIPALS AND AGENTS
Article first published online: 8 OCT 2009
© 2009 Western Economic Association International
Volume 48, Issue 2, pages 266–273, April 2010
How to Cite
CASTILLO, M., PETRIE, R. and TORERO, M. (2010), ON THE PREFERENCES OF PRINCIPALS AND AGENTS. Economic Inquiry, 48: 266–273. doi: 10.1111/j.1465-7295.2009.00189.x
- Issue published online: 24 MAR 2010
- Article first published online: 8 OCT 2009
- Online Early publication October 8, 2009
One of the reasons why market economies are able to thrive is that they exploit the willingness of entrepreneurs to take risks that laborers might prefer to avoid. Markets work because they remunerate good judgment and punish mistakes. Indeed, modern contract theory is based on the assumption that principals are less risk averse than agents. We investigate if the risk preferences of entrepreneurs are different from those of laborers by implementing experiments with a random sample of the population in a fast-growing, small-manufacturing, economic cluster. As assumed by theory, we find that entrepreneurs are more likely to take risks than hired managers. These results are robust to the inclusion of a series of controls. This lends support to the idea that risk preferences is an important determinant of selection into occupations. Finally, our lotteries are good predictors of financial decisions, thus giving support to the external validity of our risk measures and experimental methods (JEL C93, D81, D86).