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Stochastic Wealth Dynamics And Risk Management Among A Poor Population

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  • Lybbert, Travis J.
  • Barrett, Christopher B.
  • Desta, Solomon
  • Coppock, D. Layne

Abstract

The literature on economic growth and development has focused considerable attention on questions of risk management and the possibility of multiple equilibria associated with poverty traps. We use herd history data collected among pastoralists in southern Ethiopia to study stochastic wealth dynamics among a very poor population. These data yield several novel findings. Although covariate rainfall shocks plainly matter, household-specific factors, including own herd size, account for most observed variability in wealth dynamics. Despite longstanding conventional wisdom about common property grazing lands, we find no statistical support for the tragedy of the commons hypothesis. It appears that past studies may have conflated costly self-insurance with stocking rate externalities. Such self-insurance is important in this setting because weak livestock markets and meager social insurance cause wealth to fluctuate largely in response to biophysical shocks. These shocks move households between multiple dynamic wealth equilibria toward which households converge following nonconvex path dynamics. The lowest equilibrium is consistent with the notion of a poverty trap. These findings have broad implications for the design of development and relief strategies among a poor population extraordinarily vulnerable to climatic shocks.

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Bibliographic Info

Paper provided by Cornell University, Department of Applied Economics and Management in its series Working Papers with number 14736.

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Date of creation: 2002
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Handle: RePEc:ags:cudawp:14736

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Keywords: common property; covariate risk; Ethiopia; idiosyncratic risk; poverty traps; social insurance; Risk and Uncertainty; O1; Q12;

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  1. Dasgupta, Partha & Ray, Debraj, 1986. "Inequality as a Determinant of Malnutrition and Unemployment: Theory," Economic Journal, Royal Economic Society, vol. 96(384), pages 1011-34, December.
  2. Sieff, Daniela F., 1999. "The effects of wealth on livestock dynamics among the Datoga pastoralists of Tanzania," Agricultural Systems, Elsevier, vol. 59(1), pages 1-25, January.
  3. Marcel Fafchamps & Chris Udry & Katherine Czukas, . "Drought and Saving in West Africa: Are Livestock a Buffer Stock?," Working Papers 97013, Stanford University, Department of Economics.
  4. Binswanger, Hans P & McIntire, John, 1987. "Behavioral and Material Determinants of Production Relations in Land-Abundant Tropical Agriculture," Economic Development and Cultural Change, University of Chicago Press, vol. 36(1), pages 73-99, October.
  5. Fafchamps, Marcel & Gavian, Sarah, 1996. "The Spatial Integration of Livestock Markets in Niger," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 5(3), pages 366-405, October.
  6. Upton, Martin, 1986. "Production policies for pastoralists: The Borana case," Agricultural Systems, Elsevier, vol. 20(1), pages 17-35.
  7. Banerjee, Abhijit V & Newman, Andrew F, 1994. "Poverty, Incentives, and Development," American Economic Review, American Economic Association, vol. 84(2), pages 211-15, May.
  8. Cossins, Noel J. & Upton, Martin, 1987. "The Borana pastoral system of Southern Ethiopia," Agricultural Systems, Elsevier, vol. 25(3), pages 199-218.
  9. Stefan Dercon, 1996. "Wealth, risk and activity choices: cattle in Western Tanzania," Economics Series Working Papers WPS/1996-08, University of Oxford, Department of Economics.
  10. MICHAEL R. CARTER & Frederic Zimmerman, 1998. "The Dynamic Cost and Persistence of Asset Inequality in an Agrarian Economy," Wisconsin-Madison Agricultural and Applied Economics Staff Papers 416, Wisconsin-Madison Agricultural and Applied Economics Department.
  11. Huysentruyt, Marieke & Barrett, Christopher B. & McPeak, John G., 2002. "Social Identity And Manipulative Interhousehold Transfers Among East African Pastoralists," Working Papers 14746, Cornell University, Department of Applied Economics and Management.
  12. Fafchamps, Marcel, 1998. "The Tragedy of the Commons, Livestock Cycles and Sustainability," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 7(3), pages 384-423, October.
  13. John G. McPeak & Christopher B. Barrett, 2001. "Differential Risk Exposure and Stochastic Poverty Traps Among East African Pastoralists," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(3), pages 674-679.
  14. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May.
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