Wealth and Time Preference in Rural Ethiopia
AbstractThis study measured the discount rates of a sample of 262 farm households in the Ethiopian highlands, using a time preference experiment with real payoffs. In general, the median discount rate was very high—more than double the interest rate on the outstanding debt—and varied systematically with wealth and risk aversion. Although we do not have a good theory for explaining the linkage between rates-of-time preferences (RTPs) and risk aversion, our findings warn that these two aspects of household behavior reinforce each other and are easily confused. Our results have important implications for understanding households’ behavior. Because the RTPs were so high, what might seem like profitable investments from the outside might not seem so from the farmers’ perspectives. Furthermore, when future returns were uncertain, risk-averse decision makers favored projects with shorter payback periods and were less willing to invest in projects with long-term benefits. Formal capital market development, including lending and mortgage markets—currently non-existent in most of rural Ethiopia—may help reduce RTPs and cause more investments to be acceptable. The results also suggested the need for more research on the linkages between risk aversion and RTPs in low-income countries.
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Bibliographic InfoPaper provided by Resources For the Future in its series Discussion Papers with number dp-08-16-efd.
Date of creation: 15 Jun 2008
Date of revision:
Discounting; Ethiopian farm households; experimental studies; interval regression; time preference;
Find related papers by JEL classification:
- C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models
- C93 - Mathematical and Quantitative Methods - - Design of Experiments - - - Field Experiments
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
- Q12 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Micro Analysis of Farm Firms, Farm Households, and Farm Input Markets
- Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply (the Commons)
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