Inequality and risk-taking behaviour

Becker, Murphy and Werning (2005) found that individuals about to participate in a status tournament may take fair gambles even though they are risk averse in both wealth and status. Here, this insight is matched with that of Hopkins and Kornienko (2010) that in a tournament or status competition one can consider equality either in terms of initial endowments or in terms of the status or rewards available. It is shown that while risk-taking is decreasing in the inequality of initial endowments, it is increasing in the inequality of status rewards. Further, it is shown that the poorest will be risk loving if the lowest level of status awarded is sufficiently low. Thus, the disadvantaged in society rationally engage in risky behavior when society is sufficiently unequal. Finally, as greater inequality in terms of social status induces gambling, it can cause greater inequality of wealth.