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Risk and intertemporal substitution: Livestock portfolios and off-take among Kenyan pastoralists

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  • Lybbert, Travis J.
  • McPeak, John

Abstract

Most decisions involve variability in two dimensions: uncertainty across states of nature and fluctuations over time. The stakes involved in tradeoffs between these variability dimensions are especially high for the poor who have difficulty managing and recovering from shocks. We assume Epstein and Zin recursive preferences and estimate risk aversion and intertemporal substitution as distinct preferences using data from Kenyan herders. Results suggest that the assumption implicit in additive expected utility models that relative risk aversion (RRA) is the inverse of the elasticity of intertemporal substitution (EIS) is flawed. Specifically, our RRA and EIS estimates are consistent with a preference for the early resolution of uncertainty, which we believe is driven importantly by the instrumental value of early uncertainty resolution. This same preference pattern is consistent with asset smoothing in response to a dynamic asset threshold.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 97 (2012)
Issue (Month): 2 ()
Pages: 415-426

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Handle: RePEc:eee:deveco:v:97:y:2012:i:2:p:415-426

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Web page: http://www.elsevier.com/locate/devec

Related research

Keywords: Elasticity of intertemporal substitution; Risk aversion; Recursive utility; Asset dynamics; Poverty;

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References

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Cited by:
  1. Carter, Michael R. & Lybbert, Travis J., 2012. "Consumption versus asset smoothing: testing the implications of poverty trap theory in Burkina Faso," Journal of Development Economics, Elsevier, vol. 99(2), pages 255-264.
  2. Farrin, Kathleen M. & Miranda, Mario J., 2013. "Premium Benefits? A Heterogeneous Agent Model of Credit-Linked Index Insurance and Farm Technology Adoption," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 149666, Agricultural and Applied Economics Association.

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