Preferences, Institutions and Economic Outcomes: An Empirical Investigation

A non-technical summary

by Dr. Olga J. Skriabikova

This dissertation shows that individual preferences, such as risk attitude and social trust, affect

economic choices.

Social trust transmitted through generations is likely to have a causal effect on the choice of economic

and political systems. If there is little trust in the society, systems with low government control are

inefficient. Therefore, societies that suffered from repressions hundreds of years ago, are more likely

to support a strongly regulated economic and political system nowadays. This conclusion is illustrated

by the developments in post-Soviet countries in 1990’s, in particular, in Ukraine. Despite support from

the Western states, implementation of a democratic political system and of a market-oriented

economic system did not go as well as expected. In 2007, during the Orange Revolution in Ukraine,

political choices were clearly divided, such that the western part of Ukraine supported a Western

model of democracy and a market economy. The population in the East, in contrast, preferred to

restore the autocratic, strongly regulated system similar to the organisation of the Soviet Union.

Additionally, the recent events of 2014 demonstrate that the underlying differences in preferences still

can play a prominent role.

Risk preference is an important factor that affects labour market choices, such as occupational choice,

the choice of employment status and job mobility. Risk-averse individuals are prepared to accept

lower wages as long as the stability of their earnings is guaranteed. This finding illustrates how

important is the first choice of occupation, since people who are sorted in “wrong” occupations, are

more likely to experience stress and be forced to switch. Human capital accumulated during the years

of studying and working in the original occupation decreases its value. This brings negative economic

(and emotional) consequences for employees and for society, which has to pay for these choices.

Apart from that, various measures for promoting self-employment will only be successful in risk-

tolerant populations. Risk-averse individuals are much less likely to become self-employed, unless

they have access to information and skills that can diminish the riskiness of entrepreneurship.

Risk attitudes are likely to affect job mobility decisions. Changing jobs is a way of receiving new

experience and developing new competencies. However, risk-averse people will change jobs only if

the risk of changing jobs is generously compensated. This finding has an implication for the policy that

intends to stimulate people to remain vital and mobile on the labour market. Since people, as they

grow older, tend to become more risk-averse, the measures stimulating job mobility, especially among

older workers, should take into account that more risk-averse people will need a larger compensation

for changing jobs than more risk-tolerant individuals. It is important to realise that changes that always

bring the risk of unknown, imply more (emotional) costs for more risk-averse people.