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Brigitte Hochmuth, Ph.D.

University of Copenhagen, Denmark

Authors: Brigitte Hochmuth, Monika Merz and Fabian Prettenthaler

Abstract: This paper studies howindividual risk attitudes shape occupational choice andwealth accumulation. Using self-reported individual risk preferences from the German Socioeconomic Panel (GSOEP), we estimate that an increase in risk tolerance raises the probability of a worker transitioning to self-employment. We also develop a life-cycle model of occupational choice with Epstein-Zin preferences and heterogeneous risk attitudes to study how risk aversion interacts with entrepreneurial ability and wealth in determining entry into self-employment and its aggregate implications. Counterfactual simulations show that increasing business risk reduces entry but improves selection by entrepreneurial skills. In contrast, Germany’s “1-Euro GmbH” reformof 2008weakened the role of risk tolerance for entry and increased participation by more risk-averse individuals.

JEL classification: E21, E24, J24.
Keywords: recursive utility, individual risk preferences, occupational choice, business risk, limited liability

Full Text: Heterogeneous Risk Preferences, Entrepreneurship, and Wealth