The Korean Economic Review
Estimating Risk Aversion Using Individual-Level Survey Data
Young-Il Kim (Sogang University), Jungmin Lee (Sogang University)Year 2012Vol. 28No. 2
Attitude towards risk can be an important factor in explaining various economicdecisions, such as the choice of self-employment. As a first step towards understanding theprevalence of self-employment in South Korea, we structurally estimate risk aversionparameters based on the standard expected utility theory. We use hypothetical lotteryquestions from a large-scale longitudinal survey (the Korean Labor and Income PanelStudy) conducted in two waves to a sample of approximately 8,000 individuals. Theestimation results show that the constant relative risk aversion parameter ranges from 0.6 to0.8: male, younger, less educated, unmarried and higher income individuals are less riskaverse. Erroneous responses are more likely for male, younger, more educated and poorerrespondents. We also find significant impact of responses to the hypothetical questions onself-employment, which suggests that our estimates for risk preferences are likely predictiveof actual choice of self-employment.