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Changing background risk and risk-taking - Evidence from the field

Author

Listed:
  • Linda Kleemann

    (IfW Kiel, Germany)

  • Marie-Catherine Riekhof

    (ETH Zurich, Switzerland)

Abstract

Decisions involving risk are usually taken in the presence of other insurable or non-insurable risks, the latter type called background risk. We examine how changing background risk influences risk-taking based on panel data with monthly observations from Senegalese fishermen. Fishing income is volatile and income risk depends on weather conditions and on technologies employed. To measure risktaking, we use an incentivized investment task. To measure background risk, we consider long-run wind conditions and a measure based on comparing standardized monthly income deviations from the yearly individual mean. We find that the latter measure that controls for technology choices and thus takes conscious reduction of risk exposure into account has a significant impact when overall fishing income is below average. Then, higher income risk increases risk-taking, suggesting intemperate behavior in low-income situations. This effect is stronger for poorer fishermen, highlighting the need for safety nets.

Suggested Citation

  • Linda Kleemann & Marie-Catherine Riekhof, 2018. "Changing background risk and risk-taking - Evidence from the field," CER-ETH Economics working paper series 18/301, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    • Handle: RePEc:eth:wpswif:18-301
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    File URL: https://www.ethz.ch/content/dam/ethz/special-interest/mtec/cer-eth/cer-eth-dam/documents/working-papers/WP-18-301.pdf
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    More about this item

    Keywords

    risk-taking; background risk; temperance; investment; fisheries; Senegal;
    All these keywords.

    JEL classification:

    • C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • Q22 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Fishery

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