Crowded out: Heterogeneity in risk attitudes among poor households in the US

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. Heads of households who are less risk averse may be willing to take on the extra risk from smaller resource margins resulting from additional dependants, implying a negative relationship between household size and risk aversion. However, if the size of the household is a result of exogenous forces some heads of households may become more risk averse with more dependants. Household size can also reflect a risk management choice that involves adding non-dependant members who can provide resources and risk sharing. However, this possibility is limited to homes that are not already too 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.

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