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The Subsistence Constraint and Endogenous Risk Aversion

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  • Joel M. Guttman

Abstract

This paper contributes to the literature on endogenous preferences by showing that, when income is close to the minimum required for subsistence, individuals rationally will behave as if they were risk averse. It is suggested that observed risk aversion in empirical studies can be explained by the fact that, in the distant past, most people lived close to the subsistence constraint. It is shown that this approach can account for a number of empirical phenomena, including increasing income equality over time, decreasing risk aversion as income increases, and the economic role of insurance companies.

Suggested Citation

  • Joel M. Guttman, 2008. "The Subsistence Constraint and Endogenous Risk Aversion," NFI Working Papers 2008-WP-01, Indiana State University, Scott College of Business, Networks Financial Institute.
    • Handle: RePEc:nfi:nfiwps:2008-wp-01
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    References listed on IDEAS

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    7. Dwyer, Peggy D. & Gilkeson, James H. & List, John A., 2002. "Gender differences in revealed risk taking: evidence from mutual fund investors," Economics Letters, Elsevier, vol. 76(2), pages 151-158, July.
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    More about this item

    Keywords

    risk aversion; endogenous preferences; insurance;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • Z10 - Other Special Topics - - Cultural Economics - - - General

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