How does individual risk preference affect employment and innovativeness?

Abstract

The primary goal of this dissertation is to find answers to the big question: Why are public employees commonly criticized for being less innovative, more risk-averse, and more unwilling to change? Prior research has indicated that public sector employees are indeed different from their private peers. For example, previous researchers have found that public employees are more concerned with job security and less concerned with higher pay. In addition, they found that public sector is more change resistant than private sector. However, little is known about the source of such differences. While the differences may arise from various constraints inherent in the private vs. public employment settings, they may also reflect underlying personality or preference dissimilarities. One likely source of preference heterogeneity involves individual’s risk preferences. Since public employment is considered relatively secure in comparison with employment in other sectors, this study hypothesizes that more risk-averse individuals may self-select into the public sector. Then, if risk preference is associated with other characteristics that may lead to criticism, such as more unwilling to change, findings may explain why public employees are less innovative and more risk-averse.

This study uses the “relative risk tolerance” as a quantitative proxy for people’s risk preferences. To minimize the potential for endogeneity bias, this study uses individuals’ early-stage risk tolerance responses to predict their future sector choices. Using data from the NLSY79, this study finds that higher levels of risk aversion are predictive of greater propensity to pursue careers in the public sector. An individual whose level of risk tolerance is one standard deviation below the mean is 11% more likely to seek employment in the government relative to someone with average risk tolerance. Individuals do have tendencies to “self-select” into different sectors according to their risk preferences. In addition, this study finds a positive relationship between risk preference and innovativeness. However, such a relationship is only significant for the non-extreme risk-seeking subgroup. For risk-seeking individuals, the relationship between risk preference and innovativeness is simply undetermined. Several important policy and managerial implications are discussed in this dissertation.