RESEARCH PAPER NO. 845

RISK PREFERENCE AND EMPLOYMENT CONTRACT TYPE

BY

SARAH BROWN, LISA FARRELL, MARK N. HARRIS &

JOHN G. SESSIONS

APRIL 2002

Department of Economics. University of Melbourne. Melbourne Victoria 3010 Australia

ABSTRACT

We consider three broad types of employment contract vis. self employment, PRP, and fixed wage employment. We focus on the implied degree of income risk associated with each type of employment contract, arguing that such risk falls as we move from self-employment at one extreme to fixed wage employment at the other. We investigate the possibility that there is a systematic relationship between employment with a particular contract type and risk preference as proxied by expenditure on risky goods and goods associated with risk averse behaviour. A typical question might be: 'do self-employed individuals attempt to compensate for the relatively high level of income risk they face by reducing their expenditure on relatively risky goods? Or, do such individuals have a taste for risk which they express in both their working and non-working life?" Our empirical analysis, based on pooled cross-section data drawn from the British Family Expenditure Survey 1997-2000, provides evidence of a systematic relationship between employment contract type and risk preference, with, for example, self-employed workers being more (less) likely to engage in the consumption of "risky" (financial security) products. The results are based on the Ordered Generalized Extreme Values model (OGEV), a relatively infrequently used discrete choice model, which importantly allows for ordering and correlation in the observed alternatives.