Disentangling Risk Attitudes and Other-Regarding Preferences: Theory and Experiment
2023
Most decisions we make in life have uncertain consequences and impact or involve other people. Yet we do not fully understand how those two fundamental attitudes toward risks and others operate together and interact. In a flexible yet principled manner, we proposed a unified framework to study risk attitudes and other-regarding preferences. We also derive closed-form solutions to choice problems that characterize how all these preferences operate together for a parametric specification. Moreover, to test the implications of our model and those of a competing theory, we deploy a laboratory experiment that uses convex budgets to elicit preferences in four types of tasks: (1) deterministic giving, (2) fair risks, (3) risks that are ex-post unfair but ex-ante fair, and (4) probabilistic giving. We find that participants’ behavior is consistent with our model’s predictions. Subjects also exhibit both ex-post and ex-ante fairness preferences. Novel to the literature, we fit our model’s parameters at the individual level, which allows us to disentangle all four preference types: risk attitudes, altruism, inequality aversion, and ex-ante vs. ex-post fairness concerns. Notably, we estimate the weight of ex-ante fairness preferences for each individual. Finally, we compare the predictive validity of our model against a competing theory.
Recommended citation: Feldman, P. & López Vargas, K. (2023). "Disentangling Risk Attitudes and Other-Regarding Preferences: Theory and Experiment." Working Paper.