Growth and Risk: Methodology and Micro Evidence
AbstractThere has been a revival of interest in the effect of risk on economic growth. We quantify both ex ante and ex post effects of risk using a stochastic version of the Ramsey model. We develop a simulation-based econometric methodology which allows us to estimate the model in the structural form suggested by theory. The methodology is applied to micro data from a remarkable long-running panel data set for rural households in Zimbabwe. We find that risk substantially reduces growth: in the ergodic distribution the mean (across households) capital stock is 46% lower than in the absence of risk. This is, we believe, the first micro-based estimate of the effect of shocks on growth. About two-thirds of the impact of risk is due to the ex ante effect (i.e. the behavioral response to risk) which is usually not taken into account in policy design. Our results suggest that the effectiveness of policy interventions which reduce exposure to shocks or help households in risk man!agement may be seriously underestimated.
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Bibliographic InfoPaper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-068/2.
Date of creation: 02 Sep 2003
Date of revision: 19 Sep 2006
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Web page: http://www.tinbergen.nl
growth; risk; Ramsey model; convergence.;
Other versions of this item:
- D10 - Microeconomics - - Household Behavior - - - General
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
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