Butler J.V. and J.B.Miller
Management Science – 121-6 (2017): 1205-1246

Keywords: social risk; social perception; intention; betrayal aversion; trust; control

Abstract: Previous research has documented a behavioral distinction between “social risk,” or risk caused by human factors, and natural risk. In particular, people tend to demand a premium on the probability of a favorable outcome in order to expose themselves to a social source of risk rather than a natural source of risk. Several explanations for what drives this social risk premium have been offered—most prominently, (i)an aversion to a counterparty’s potentially malign intentions and (ii) a more general aversion to ceding control to someone with conflicting interests. We propose that a fundamental determinant of the social risk premium may relate to a counterparty’s capacity to engage in intentional action. We employ a between-subjects experimental design in which we manipulate subjects’ capacity for intentional action. Our design allows us to identify the component of the social risk premium related to an aversion to betrayal, independent of any aversion to ceding control. Furthermore, our results show that intentions are a crucial determinant of the social risk premium. We identify factors that eliminate, and may even change the sign of, the social risk premium. Our results contribute to our understanding of the factors that influence the perception of social risk and have implications for optimal contract design in a wide variety of situations involving social risk.