Circumstantial Risk: Impact of future tax evasion and labor supply opportunities on risk exposure

This paper examines whether investment in a risky asset depends on future circumstances. We conduct a laboratory experiment where subjects have the opportunity to invest earned income in a risky asset and, depending on randomly assigned treatment states, have the opportunity to respond to the outcome of the investment through extra labor e ort and/or tax evasion. We nd evidence that ex-post access to labor opportunities decreases ex-ante risk-taking, while access to tax evasion has no e ect. Having both opportunities leads to lower risk-taking, but this e ect is not statistically signi cant. We explore the channels behind these results with two additional treatments and nd that our results are driven by background risk rather than exibility.

Dörrenberg, Philipp, Denvil Duncan and Christopher Zeppenfeld (2015), Circumstantial Risk: Impact of future tax evasion and labor supply opportunities on risk exposure, Journal of Economic Behavior and Organization 109 , 85-100