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Growth and Risk: Methodology and Micro Evidence

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Author Info
Chris Elbers () (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)
Jan Willem Gunning () (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)
Bill Kinsey () (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)

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Abstract

There 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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Publisher Info
Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-068/2.

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Date of creation: 02 Sep 2003
Date of revision: 19 Sep 2006
Handle: RePEc:dgr:uvatin:20030068

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Web page: http://www.tinbergen.nl/

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Related research
Keywords: growth risk Ramsey model convergence.

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Find related papers by JEL classification:
D10 - Microeconomics - - Household Behavior - - - General
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer 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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References listed on IDEAS
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. Chris Elbers & Jan Willem Gunning, 2002. "Growth Regression and Economic Theory," Tinbergen Institute Discussion Papers 02-034/2, Tinbergen Institute. [Downloadable!]
    Other versions:
  2. Per Krusell & Anthony A. Smith, Jr., . "On the Welfare Effects of Eliminating Business Cycles," GSIA Working Papers 243, Carnegie Mellon University, Tepper School of Business. [Downloadable!]
    Other versions:
  3. Chris Elbers & Jan Willem Gunning, 2004. "Estimating Vulnerability," Development and Comp Systems 0408015, EconWPA. [Downloadable!]
  4. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2001. "The Empirical Importance of Precautionary Saving," American Economic Review, American Economic Association, vol. 91(2), pages 406-412, May. [Downloadable!] (restricted)
    Other versions:
  5. Binder, M. & Pesaran, M.H., 1996. "Stochastic Growth," Cambridge Working Papers in Economics 9615, Faculty of Economics, University of Cambridge.
  6. Levhari, David & Srinivasan, T N, 1969. "Optimal Savings under Uncertainty," Review of Economic Studies, Blackwell Publishing, vol. 36(106), pages 153-63, April. [Downloadable!] (restricted)
  7. Binder, Michael & Pesaran, M Hashem, 1999. " Stochastic Growth Models and Their Econometric Implications," Journal of Economic Growth, Springer, vol. 4(2), pages 139-83, June. [Downloadable!] (restricted)
  8. Easterly, William & Kremer, Michael & Pritchett, Lant & Summers, Lawrence H., 1993. "Good policy or good luck?: Country growth performance and temporary shocks," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 459-483, December. [Downloadable!] (restricted)
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  9. Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October. [Downloadable!] (restricted)
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  10. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March. [Downloadable!] (restricted)
  11. Paul Collier & Jan Willem Gunning, 1999. "Explaining African Economic Performance," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 64-111, March. [Downloadable!] (restricted)
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  12. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September. [Downloadable!] (restricted)
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  13. Christopher D. Carroll, 1997. "Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)," NBER Working Papers 6298, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  14. Deaton, A. & Grosh, M., 1998. "Consumption," Papers 191, Princeton, Woodrow Wilson School - Development Studies.
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Cited by:
(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. Cesar Calvo & Stefan Dercon, 2005. "Measuring Individual Vulnerability," Economics Series Working Papers 229, University of Oxford, Department of Economics. [Downloadable!]
  2. Chris Elbers & Jan Willem Gunning, 2004. "Transitional Growth and Income Inequality: Anything Goes," GE, Growth, Math methods 0409001, EconWPA, revised 08 Sep 2004. [Downloadable!]
  3. Kenneth Harttgen & Isabel Günther, 2007. "Estimating Vulnerability to Covariate and Idiosyncratic Shocks," Ibero America Institute for Econ. Research (IAI) Discussion Papers 154, Ibero-America Institute for Economic Research. [Downloadable!]
  4. Stefan Dercon, 2004. "Growth and Shocks: evidence from rural Ethiopia," Development and Comp Systems 0409036, EconWPA. [Downloadable!]
    Other versions:
  5. Stefan Dercon (QEH), . "Vulnerability: a micro perspective," QEH Working Papers qehwps149, Queen Elizabeth House, University of Oxford. [Downloadable!]
  6. Stefan Dercon (QEH), . "Risk, Growth and Poverty: what do we know, what do we need to know?," QEH Working Papers qehwps148, Queen Elizabeth House, University of Oxford. [Downloadable!]
  7. Frederick van der Ploeg & Steven Poelhekke, 2007. "Volatility, Financial Development and the Natural Resource Curse," Economics Working Papers ECO2007/36, European University Institute. [Downloadable!]
    Other versions:
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