Long-term effects of risk and time preferences on households welfare in emerging market economies
Final Report Abstract
This research project examined the interlinkages between individual preferences, risk management strategies and poverty along the hypothesized vicious cycle of poverty using the emerging country cases of Thailand and Vietnam. With respect to the first relationship between individual preferences and risk management strategies, the project produced two manuscripts that focused on two different risk management strategies, i.e., (i) a households investment in assets and (ii) a household’s decision to send a member away to work. In general, empirical findings suggest a positive association between risk averse behavior and low risk - low return management activities. Increases in risk aversion that were driven by covariate shocks are significantly related to lower return investments and, albeit not yet definitive, lower engagement in migration. The same two manuscripts produced empirical results on the second interrelation between risk management and poverty. Results indicate that the poor are excluded from higher risk - higher return management strategies, probably because of lower ability and willingness to take risk, particularly when exposed to covariate shocks. One manuscript shows that the negative effect of risk aversion on returns is more severe among the relatively poor than among the relatively wealthy. The other manuscript demonstrates that migration outcomes of poorer households are more sensitive to covariate shocks due to their restricted ability to mediate adverse events by means of their socio-economic status and willingness to take risk. The research project produced two further manuscripts that shed light on the causal relationship between poverty and individual preferences in the presence of adverse covariate risks. The results indicate that the exposure to severe covariate shocks trigger substantial increases in individuals’ risk aversion. This negative effect is more pronounced among the poor. The results, hence, indicate that causality between poverty and individual preferences runs from poverty to risk aversion. Overall, the project’s empirical findings suggest the existence of a negative feedback loop, where covariate shocks, such as severe abnormal weather events, distort individual preferences in a way that drive individuals to management decisions that sustain their lower living standards. These environmentally-induced poverty traps recently receive more attention, especially in the context of Climate Change. The project results call for policy interventions that enable the poor to tolerate covariate risks. That involves both the advancement of insurance opportunities as well as the development of targeted Climate Change mitigation and adaptation programs.
Publications
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(2018). Temporal Stability of Risk Attitudes and the Impact of Adverse Shocks - A Panel Data Analysis from Thailand and Vietnam. World Development 102 (2018): 262-274
Liebenehm, S.
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(2019). Rainfall Shocks and Risk Aversion: Evidence from Southeast Asia. Annual International Conference of the Research Group on Development Economics (AEL), June 28- 29, 2018 in Zurich, Switzerland and at Verein für Socialpolitik, September 2-5, 2018, Walter Eucken Institut in Freiburg i. Br., Germany
Liebenehm, S., N. Petrusjanz and E. Strobl
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(2019). Risk Attitudes and Returns in Rural Economies. Sustainability and Development Conference, October 11-14, 2019, The University of Michigan, Michigan, USA and at Asian and Australasian Society of Labour Economics, December 12 -14, 2019, National University of Singapore
Liebenehm, S., L. Menkhoff and H. Waibel
