WP 2021-03 Crowded Out: Heterogeneity in Risk Attitudes Among Poor Households in the US
Forthcoming, Journal of Risk and Uncertainty
AUTHORS: Arianna Galliera and E. Elisabet Rutström
ABSTRACT: Not much is known about the heterogeneity of risk attitudes among poor households in rich countries. This paper provides estimates from a unique data set collected among the urban poor in Atlanta, Georgia. The data set includes lab-in-the-field experiments on the relationship between risk attitudes and several household characteristics. Apart from looking at income, wealth and education, we are particularly interested in household composition as it captures the number and kind of people who are dependant on the income of the household head. We view the relationship between risk aversion of the household head and the composition of the household as possibly bi-directional: on the one hand, the increased risk that arises due to smaller discretionary resource margins when having more dependants may mean that only heads with low risk aversion choose to have a large number of dependants. On the other hand, as the ability to manage risk becomes harder with smaller discretionary resource margins some heads may simply become more averse to take on risks, especially if the number of dependants is not a choice of theirs but a result of exogenous forces. One risk management tool that may be available is to allow additional non-dependant members into the household, who can provide resources and risk sharing, or alternatively to reduce the fixed costs of the household by moving to a smaller house. However, neither of these may be possible if the home is already crowded. We find that household size correlates positively with the risk aversion of the head, but with a large proportion of children the correlation is strongly dampened. However, this negative effect of children is conditional on the home not already being crowded. These heterogeneous findings have implications for the design of new insurance, savings and credit programs where risk attitudes are important to the decisions to adopt.