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
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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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