Just Luck: An Experimental Study of Risk Taking and Fairness

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 studies people’s fairness preferences in risky situations. It reports the results from a two stage dictator game where the distribution phase was preceded by a risk-taking phase in which individuals made decisions about whether to take risky gambles which affected their earnings. The design allows us to study whether or not inequalities between those who take risk and those who chose 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 estimates of the prevalence of different fairness ideals among spectators are almost identical to the prevalence that can be inferred from the choices of stakeholders.