Very preliminary and incomplete draft Risk Attitudes, Time Preferences and the Incidence of Informality among Workers: Evidence from a Transition Country Thomas Dohmen ROA, Maastricht University, IZA and DIW T.Dohmen@ROA.unimaas.nl Melanie Khamis IZA khamis@iza.org Hartmut Lehmann DARRT, University of Bologna, IZA, WDI and DIW hartmut.lehmann@unibo.it August 2009 Abstract The work force in transition countries might be a lot more risk averse than the work force in a “normal” developing country where uncertainty has been a way of life for generations for all but the most privileged strata. In contrast, most of the older workers are used to total security provided by the state and might be very reluctant to engage in unsure self-employment in the informal sector for example. One crucial point of the research is to relate demographic characteristics like age, gender, educational attainment to risk attitudes that in turn will be linked to the incidence of informal or formal employment. A second important area as far as behavior patterns are concerned that might impact on informality are time preferences of workers. Here we would expect that many workers have very high discount rates since they experienced terrible turmoil in their lives during the first decade of the transition (this is especially true in countries of the former Soviet Union). Such high discount rates can have different implications for choosing informality or formality. On the one hand, workers might discard benefits that are in a distant future (e.g., pension benefits accruing in formal employment), and thus more willing to take up informal employment that might be associated with higher net wages. On the other hand, if, e.g., the fruits of being engaged in informal self-employment can be reaped only in a somewhat distant future, workers might prefer formal employment as it guarantees a certain wage now even if over a longer time period income from informal self- employment is higher. Preliminary findings from the Ukrainian Longitudinal Monitoring Survey (2007) suggest that general risk and career risk attitudes are important determinants of being in the informal labor market while measures on time preferences do not yield significant results. JEL codes: J24, O17, P20