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RISK PREFERENCES AND EXPECTED UTILITY: EVIDENCE FROM LABOR SUPPLY DATA

Authors

  • MEGAN DE LINDE LEONARD

    1. Leonard: Assistant Professor, Department of Economics and Business, Hendrix College, Conway, AR 72032. Phone 501-450-1453, Fax 501-450-1400, E-mail Leonard@hendrix.edu
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    • This research was partially supported by the Private Enterprise Research Center at Texas A&M University. I would like to thank Manuelita Ureta, Donald Deere, John Straub, Matthew Shapiro, Miles Kimball, Robert Barsky, Claudia Sahm, and seminar participants at Texas A&M for their helpful comments.


Abstract

This paper adds to the growing body of evidence that observed risk preferences are not consistent with expected-utility theory. Using the link between labor supply decisions and utility as outlined by Chetty (“A Bound on Risk Aversion Using Labor Supply Elasticities.” The American Economic Review, 96(5), 2006, 1821–34), I compute the curvature of utility over wealth for 3,900 individuals in the 1996 Panel Study of Income Dynamics. I then compare this estimate to a measure of relative risk aversion based on the respondents' answers to hypothetical gambling questions and find virtually zero correlation. Finally, I investigate how the two measures and their correlations change by demographic groups and risky behavior. (JEL C81, D80, J22)

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