Pure rank preferences and variation in risk-taking behavior

Oded Stark, Wiktor Budzinski, Marcin Jakubek

Research output: Contribution to journalArticlepeer-review

Abstract

Assuming that an individual's rank in the wealth distribution is the only factor determining the individual's wellbeing, we analyze the individual's risk preferences in relation to gaining or losing rank, rather than the individual's risk preferences towards gaining or losing absolute wealth. We show that in this characterization of preferences, a high-ranked individual is more willing than a low-ranked individual to take risks that can provide him with a rise in rank: relative risk aversion with respect to rank in the wealth distribution is a decreasing function of rank. This result is robust to incorporating (the level of) absolute wealth in the individual's utility function.

Original languageEnglish
Article number108636
JournalEconomics Letters
Volume184
DOIs
StatePublished - Nov 2019
Externally publishedYes

Keywords

  • Rank in the wealth distribution
  • Rank-based utility
  • Relative risk aversion
  • Variation in risk-taking behavior

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