1. Inequality aversion and risk attitudes
Ada Ferrer-i-Carbonell
ICREA & IAE-CSIC
&
Xavier Ramos
Universitat Autònoma de Barcelona & IZA

2. Inequality aversion Empirical evidence To what is it related?
Subjective measures: GINI has a negative effect on self-reported well-being.
Alesina, Di Tella, MacCulloch (2004) & Schwarze, Harpfer (2007)
To what is it related?
Risk aversion: only experimental evidence shows that risk aversion & inequality aversion are related concepts (Carlsson, Daruvala, Johansson-Stenman, 2005 ).
Mobility

3. Our contribution
Empirical test on whether inequality aversion found in Western Europe is related to risk aversion.
Uses direct measures of utility and risk
Large representative panel data set with about individuals.

4. Measuring subjective well-being
In conclusion, we would like to ask you about your satisfaction with your life in general.
Please, answer according to the following scale: 0 means ´completely dissatisfied´, 10 ´completely satisfied´.
How satisfied are you with your life, all things considered?
0___1___2___3___4___5___6___7___8___9___10
completely completely
dissatisfied satisfied

5. Assumptions: empirical evidence
Interpersonal comparability:
Individuals able to recognize and predict satisfaction level of others (pictures,videos) .
Common understanding of how to translate internal feelings into a number scale.
Measurability:
Strong positive correlation between emotional expressions (smiling, frowning, brain activity) & self-reported happiness.
Individuals will not choose to continue activities which yield low satisfaction levels.

6. Our satisfaction equation
Individual risk attitudes (Ri)  assumed constant
Inequality at the federal/time level (I) (GINI)
Other explanatory variables (Xit).
Individual effects (about 80%) (i).
E.g. intelligence, and capacity to adapt to adversities.
Time (T) and federal (F) dummy variables .

7. Empirical testing Risk attitudes constant over time
“β3Rt” can only be included with individual random effects.
We present results with FE and RE
RE: Mundlack specification for those variables that may correlate with individual time persistent traits
Cardinal/ordinal assumption makes no difference in terms of trade-offs
Ferrer-i-Carbonell & Frijters (2004)

8. Measuring risk attitudes
How do you see yourself:
Are you generally a person who is fully prepared to take risks or do you try to avoid taking risks?
Please tick a box on the scale, where the value 0 means: 'risk averse' and the value 10 means: 'fully prepared to take risks'. You can use the values in between to make your estimate.
0___1___2___3___4___5___6___7___8___9___10
risk fully prepared
averse to take risks

9. Willingness to take risks (WTR)
Validity of WTR question:
Correlation between reported WTR & individual behavior in an experimental setting
Correlation between reported WTR & reported behavior (e.g. holding stocks, smoking, & occupational choice)
Correlation between reported WTR & individual characteristics (e.g. women are more risk averse, and years of education and income correlate negatively with risk aversion).

10. Data The German Socio-Economic Panel Sample means
= about individuals & observations.
Sample means
Mean risk attitude = Most individuals (22%) report 5 and 46% of them report a 4 or less.
Mean life satisfaction = 7
Household income = 2535 (euros/month/net)
Equivalent household income =1374

11. Risk attit. & inequality aversion
Individuals are inequality averse
The more risk averse, the larger the effect of inequality on well-being
Similar effects when introducing Ri with RE

12. The effects explained The FE results: (all results are very similar)
For the most risk averse individuals, the effect of inequality = -2.07
For the average person, the GINI coeff = -0.58
The effect of GINI is positive for 21% of the sample (7 or more WTR)
RE: inequality coefficient positive for WTR = 10

13. Is it risk attitudes?
Risk attitudes correlated with other characteristics:
may it be something else than risk?
E.g. lower educated or women are more risk averse & face larger income fluctuations.
To test for this
We introduce an interaction term between GINI and (gender, years of education, & household income).
Only significant interaction:
GINI & household income, which is negative
It does not change the relationship between GINI & risk attitudes

14. Conclusions
Inequality aversion has been often proxied with estimates of risk aversion.
This paper employs two direct measures of utility and risk
To identify & estimate inequality aversion and risk aversion separately.
and
To explore the relationship between the two.

15. Summary of results Risk attitudes & inequality aversion are related
Risk attitudes determine the effect that inequality has on life satisfaction.
Most risk averse individuals are also the ones who are more inequality averse.
Consistent with the results in experimental setups.