Breaking Bad: When Being Disadvantaged Incentivizes (Seemingly) Risky Behavior

Abstract

We investigate how variation in initial conditions, which assign individuals into advantaged or disadvantaged positions, alters behavior. We illustrate the problem within a labor market context and consider the impact of accumulated debt on wage selectivity. Using a two-period model, we show that debt exerts a non-monotonic effect on wage selectivity, with agents assigned low and high levels of debt being significantly more likely to reject an initial wage offer than agents with moderate debt. This prediction is supported by our experiment, which finds a statistically significant dip in wage selectivity for subjects assigned moderate levels of debt.