Resource information
Risk-aversion has generally been found
to decrease in income. This may lead one to expect that poor
countries will be more risk-averse than rich countries.
Recent comparative findings with students, however, suggest
the opposite, giving rise to a risk-income paradox. This
paper tests this paradox by measuring the risk preferences
of more than 500 household heads spread over the highlands
of Ethiopia and finds high degrees of risk tolerance. The
paper also finds risk tolerance to increase in income
proxies, thus completing the paradox. Using exogenous
proxies, the paper concludes that part of the causality must
run from income to risk tolerance. The findings suggest that
risk preferences cannot be blamed for the failure to adopt
new technologies. Alternative explanations are discussed.
