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Risk Aversion & Intertemporal Substitution Among Kenyan Pastoralists: Two sides of the same coin?

By Travis J. Lybbert

Abstract

Uncertainty is a defining feature of poverty and has long played a central role in the macro- and micro-economics of development. Much of the empirical work in risk and uncertainty in development economics uses expected utility to study risky decision making. This is a convenient starting point, but also an unfortunate one since standard expected utility assumptions imply that individuals regard variation across dates and variation across states as identical and indistinguishable sources of variability. Consequently, little effort has been made to discern between the state and time dimensions of risk and to explore the analytical and empirical implications of such a distinction even though intertemporal decisions are often crucial among the poor in developing countries because of significant seasonality and missing markets. Recent work on poverty dynamics and asset smoothing suggests very clearly that the distinction between variation over time and variation across states of nature can matter enormously if underlying asset dynamics are characterized by dynamic thresholds and poverty traps. Motivated by this void, this paper borrows a recursive utility approach from macroeconomics (Epstein and Zin 1989) and data from Kenyan pastoralists to estimate coefficients of relative risk aversion (RRA

Year: 2007
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