May 2007

IZA DP No. 2806: Risk Aversion and Reservation Wages

substantially revised version published as "Risk attitudes and reservation wages of unemployed workers: Evidence from panel data" in: Economics Letters, 2010, 106 (3), 223-226

This study examines the relationship between individual risk aversion and reservation wages using a novel set of direct measures of individual risk attitudes from the German Socio-Economic Panel (SOEP). We find that risk aversion has a significantly negative impact on the level of reservation wages. Moreover, we show that the elasticity of the reservation wage with respect to unemployment benefits is remarkably lower for risk-averse job seekers than for risk-loving job seekers. The results are consistent with an interpretation that risk-averse job seekers set their reservation wage levels sufficiently low, so that they accept almost every job offer.