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Title: Just Luck: An Experimental Study of Risk Taking and Fairness

Authors: Alexander W. Cappelen, James Konow, Erik Ø. Sørensen and Bertil Tungodden

Abstract:

What is the fair distribution of gains and losses from risk taking? The answer to this question has wide-ranging implications for economic policy. This paper reports experimental evidence on the fairness preferences of people in risky situations. The experiment is a two stage dictator game where the distribution phase is preceded by a risk-taking phase in which individuals make decisions about whether to take risky gambles which can affect their earnings. The design allows us to study whether or not inequalities between those who take risk and those who choose a safe alternative are viewed as fair and whether or not inequalities between lucky and unlucky risk-takers are viewed as fair. We study the distributive choices of both stakeholders, whose own payoffs are affected in the distribution, and impartial spectators, who distribute as third parties. Using the estimates of a structural choice model, we find that most people view inequalities between those who take risk and those who do not as fair, but see inequalities between lucky and unlucky risk takers as unfair. We also find that the frequency of different fairness ideals among spectators is almost identical to of stakeholders.