Risk Aversion and Incentive to Abide By Legal Rules
- Risk Aversion and Incentive to Abide By Legal Rules
- Yoo, Yoon-Ha
- risk aversion; legal enforcement; uncertainty
- Issue Date
- Series/Report no.
- KDI Working Paper Series;04-24
- Does a more risk-averse individual put greater effort to abide by legal rules than the less
risk-averse? Or are the criminals really a race apart who is exceptionally risk prone?
This paper examines the relationship between the law-abiding effort of an individual
and his degree of risk aversion. It is shown that a monotone positive relationship
between risk aversion and law-abiding cost holds only when the probability of legal
sanction is exogenously given. Once the probability is endogenously chosen by the
potential perpetrator, this simple relation no longer holds. In short, a fairly risk-averse
individual can still commit a crime.
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