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Stochastic Wealth Dynamics And Risk Management Among A Poor Population

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

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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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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. Upton, Martin, 1986. "Production policies for pastoralists: The Borana case," Agricultural Systems, Elsevier, vol. 20(1), pages 17-35. [Downloadable!] (restricted)
  2. Fafchamps, Marcel & Udry, Christopher & Czukas, Katherine, 1998. "Drought and saving in West Africa: are livestock a buffer stock?," Journal of Development Economics, Elsevier, vol. 55(2), pages 273-305, April. [Downloadable!] (restricted)
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  3. Cossins, Noel J. & Upton, Martin, 1987. "The Borana pastoral system of Southern Ethiopia," Agricultural Systems, Elsevier, vol. 25(3), pages 199-218. [Downloadable!] (restricted)
  4. Banerjee, Abhijit V & Newman, Andrew F, 1994. "Poverty, Incentives, and Development," American Economic Review, American Economic Association, vol. 84(2), pages 211-15, May. [Downloadable!] (restricted)
  5. 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. [Downloadable!]
  6. 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. [Downloadable!] (restricted)
  7. Fafchamps, Marcel, 1998. "The Tragedy of the Commons, Livestock Cycles and Sustainability," Journal of African Economies, Oxford University Press, vol. 7(3), pages 384-423, October.
  8. Dercon, Stefan, 1998. "Wealth, risk and activity choice: cattle in Western Tanzania," Journal of Development Economics, Elsevier, vol. 55(1), pages 1-42, February. [Downloadable!] (restricted)
  9. Azariadis, Costas & Drazen, Allan, 1990. "Threshold Externalities in Economic Development," The Quarterly Journal of Economics, MIT Press, vol. 105(2), pages 501-26, May. [Downloadable!] (restricted)
  10. 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. [Downloadable!] (restricted)
  11. McPeak, John G & Barrett, Christopher B, 2001. " Differential Risk Exposure and Stochastic Poverty Traps among East African Pastoralists," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 83(3), pages 674-79, August. [Downloadable!] (restricted)
  12. Fafchamps, Marcel & Gavian, Sarah, 1996. "The Spatial Integration of Livestock Markets in Niger," Journal of African Economies, Oxford University Press, vol. 5(3), pages 366-405, October.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Santos, Paulo & Barrett, Christopher B., 2006. "Informal Insurance in the Presence of Poverty Traps: Evidence from Southern Ethiopia," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25487, International Association of Agricultural Economists. [Downloadable!]
  2. Naschold, Felix, 2005. "Identifying Asset Poverty Thresholds – New methods with an application to Pakistan and Ethiopia," 2005 Annual meeting, July 24-27, Providence, RI 19115, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  3. Travis Lybbert, 2006. "Indian Farmers' Valuation of Yield Distributions: Will poor farmers value 'pro-poor' seeds?," Framed Field Experiments 0059, The Field Experiments Website. [Downloadable!]
    Other versions:
  4. Lybbert, Travis J., 2005. "Indian Farmers' Valuation of Crop Yield Distributions: Will poor farmers value 'pro-poor' seeds?," 2005 Annual meeting, July 24-27, Providence, RI 19160, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  5. Danny Cassimon & Bjorn Van Campenhout, 2008. "Multiple Equilibria in the Dynamics of Financial Globalization," WEF Working Papers 0044, ESRC World Economy and Finance Research Programme, Birkbeck, University of London. [Downloadable!]
  6. Bellemare, Marc F. & Barrett, Christopher B. & Osterloh, Sharon M., 2004. "Household-Level Livestock Marketing Behavior Among Northern Kenyan and Southern Ethiopian Pastoralists," Working Papers 14749, Cornell University, Department of Applied Economics and Management. [Downloadable!]
  7. Bellemare, Marc F. & Barrett, Christopher B., 2005. "An Ordered Tobit Model of Market Participation: Evidence from Kenya and Ethiopia," Working Papers 14748, Cornell University, Department of Applied Economics and Management. [Downloadable!]
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  8. Naschold, Felix, 2009. "“Poor stays poor” - Household asset poverty traps in rural semi-arid India," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49396, Agricultural and Applied Economics Association. [Downloadable!]
  9. Antman, Francisca & McKenzie, David J., 2005. "Poverty traps and nonlinear income dynamics with measurement error and individual heterogeneity," Policy Research Working Paper Series 3764, The World Bank. [Downloadable!]
    Other versions:
  10. Barrett, Christopher B., 2003. "The Economics Of Poverty And The Poverty Of Economics: A Christian Perspective," Working Papers 14747, Cornell University, Department of Applied Economics and Management. [Downloadable!]
  11. Lei Pan, 2007. "Risk Pooling through Transfers in Rural Ethiopia," Tinbergen Institute Discussion Papers 07-014/2, Tinbergen Institute, revised 28 Sep 2007. [Downloadable!]
  12. Takasaki, Yoshito & Barham, Bradford L. & Coomes, Oliver T., 2007. "Smoothing Income against Crop Flood Losses in Amazonia: Rain Forest or Rivers as a Safety Net," Staff Paper Series 518, University of Wisconsin, Agricultural and Applied Economics. [Downloadable!]
  13. Tewodaj Mogues, 2005. "Shocks, Livestock Asset Dynamics, and Social Capital in Ethiopia," Development and Comp Systems 0512006, EconWPA. [Downloadable!]
    Other versions:
  14. Raghbendra Jha & Raghav Gaiha & Anurag Sharma, 2006. "Calorie Deprivation and Poverty Nutrition Trap in Rural India," ASARC Working Papers 2006-02, Australian National University, Australia South Asia Research Centre. [Downloadable!]
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