Status, Intertemporal Choice, and Risk-Taking

Debraj Ray, Arthur Robson

    Research output: Contribution to journalArticle

    Abstract

    This paper studies endogenous risk-taking by embedding a concern for status (relative consumption) into an otherwise conventional model of economic growth. We prove that if the intertemporal production function is strictly concave, an equilibrium must converge to a unique steady state in which there is recurrent endogenous risk-taking. (The role played by concavity is clarified by considering a special case in which the production function is instead convex, in which there is no persistent risk-taking.) The steady state is fully characterized. It displays features that are consistent with the stylized facts that individuals both insure downside risk and gamble over upside risk, and it generates similar patterns of risk-taking and avoidance across environments with quite different overall wealth levels. Endogenous risk-taking here is generally Pareto-inefficient. A concern for status thus implies that persistent and inefficient risk-taking hinders the attainment of full equality.

    Original languageEnglish (US)
    Pages (from-to)1505-1531
    Number of pages27
    JournalEconometrica
    Volume80
    Issue number4
    DOIs
    StatePublished - Jul 2012

    Fingerprint

    Risk taking
    Intertemporal choice
    Endogenous risk
    Production function
    Downside risk
    Stylized facts
    Equality
    Concavity
    Relative consumption
    Pareto
    Gambles
    Risk avoidance
    Economic growth
    Wealth

    Keywords

    • Attitudes to risk
    • Growth
    • Status

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Status, Intertemporal Choice, and Risk-Taking. / Ray, Debraj; Robson, Arthur.

    In: Econometrica, Vol. 80, No. 4, 07.2012, p. 1505-1531.

    Research output: Contribution to journalArticle

    Ray, D & Robson, A 2012, 'Status, Intertemporal Choice, and Risk-Taking', Econometrica, vol. 80, no. 4, pp. 1505-1531. https://doi.org/10.3982/ECTA9042
    Ray, Debraj ; Robson, Arthur. / Status, Intertemporal Choice, and Risk-Taking. In: Econometrica. 2012 ; Vol. 80, No. 4. pp. 1505-1531.
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