Working Paper: NBER ID: w9852
Authors: Louis Kaplow
Abstract: Individuals' risk preferences are estimated and employed in a variety of settings, notably including choices in financial, labor, and product markets. Recent work, especially in financial economics, provides estimates of individuals' coefficients of relative risk aversion (CRRA's) in excess of one, and often significantly higher. However, it can be shown that high CRRA's imply equally high values for the income elasticity of the value of a statistical life. Yet estimates of this elasticity, derived from labor and product markets, are in the range of 0.5 to 0.6. Furthermore, it turns out that even a CRRA below one is difficult to reconcile with these elasticity estimates. Thus, there appears to be an important (additional) anomaly involving individuals' risk-taking behavior in different market settings.
Keywords: risk preferences; value of statistical life; relative risk aversion; income elasticity
JEL Codes: D80; G11; G12; I10; J17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CRRA > 1 (E51) | high income elasticity of VSL (J17) |
| CRRA = 1 (C29) | income elasticity of VSL = 1 (J17) |
| higher CRRA (D11) | higher income elasticity of VSL (J17) |
| high CRRA (D11) | high VSL values (J17) |
| low empirical estimates of income elasticity (D12) | contradiction with high CRRA (D11) |