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Wealth and Time Preference in Rural Ethiopia

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  • Yesuf, Mahmud
  • Bluffstone, Randall

Abstract

This 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 Info

Paper provided by Resources For the Future in its series Discussion Papers with number dp-08-16-efd.

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Date of creation: 15 Jun 2008
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Handle: RePEc:rff:dpaper:dp-08-16-efd

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Related research

Keywords: Discounting; Ethiopian farm households; experimental studies; interval regression; time preference;

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References

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  1. Pender, John L., 1996. "Discount rates and credit markets: Theory and evidence from rural india," Journal of Development Economics, Elsevier, vol. 50(2), pages 257-296, August.
  2. Moore, Michael J. & Viscusi, W. Kip, 1990. "Discounting environmental health risks: New evidence and policy implications," Journal of Environmental Economics and Management, Elsevier, vol. 18(2), pages S51-S62, March.
  3. Holden, Stein T. & Shiferaw, Bekele & Wik, Mette, 1998. "Poverty, market imperfections and time preferences: of relevance for environmental policy?," Environment and Development Economics, Cambridge University Press, vol. 3(01), pages 105-130, February.
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Cited by:
  1. Göbel, Kristin & Grimm, Michael & Lay, Jann, 2012. "Constrained Firms, Not Subsistence Activities: Evidence on Capital Returns and Accumulation in Peruvian Microenterprises," IZA Discussion Papers 6866, Institute for the Study of Labor (IZA).
  2. Bruno Martorano & Sudhanshu Handa & Carolyn Halpern & Harsha Thirumurthy & UNICEF Innocenti Research Centre, 2014. "Subjective Well-being, Risk Perceptions and Time Discounting: Evidence from a large-scale cash transfer programme," Innocenti Working Papers inwopa717, UNICEF Innocenti Research Centre.
  3. Wang, Mei & Rieger, Marc Oliver & Hens, Thorsten, 2011. "How Time Preferences Differ: Evidence from 45 Countries," Discussion Papers 2011/18, Department of Business and Management Science, Norwegian School of Economics.

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