Managing social risks – tradeoffs between risks and inequalities

As societies are increasingly concerned with risks, it is important to evaluate risks not only from an individual but also from a societal perspective. Two essential dimensions of public or social risks are the inequality concerning the distribution of risks over various groups and members of society and the level of risk faced by individuals and by the society as a whole. This paper disentangles these two essential dimensions and studies people’s preferences concerning different types of allocations of risks over groups of people. We do so in a laboratory experiment with real incentives, where subjects are placed in the role of a social planner and choose between different types of allocations of risks over 10 other participants. The allocations differ only in terms of dispersion, i.e. they differ only in terms of inequality and risk. The majority of our subjects exhibit clear preferences over different types of allocations consistent with ex ante inequality and individual risk aversion, and ex post inequality and collective risk seeking behavior. These results are consistent with the literature on public risk and can be reconciled with responsibility aversion.