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Growth and Risk: Methodology and Micro Evidence

  • Chris Elbers
  • Jan Willem Gunning
  • Bill Kinsey

How exposure to risk affects economic growth is a key issue in development. This article quantifies both the ex ante and ex post effects of risk using long-running panel data for rural households in Zimbabwe. It proposes a simulation-based econometric methodology to estimate the structural form of a micro model of household investment decisions under risk. The key finding is that risk substantially reduces growth in this particular setting: the mean capital stock in the sample is (in expectation) 46 percent lower than in the absence of risk. About two-thirds of the impact of risk is due to the ex ante effect (that is, the behavioral response to risk), which is usually not taken into account in policy design. These results suggest that policy interventions that reduce exposure to shocks or that help households manage risk could be much more effective than is commonly thought. Copyright 2007, Oxford University Press.

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Article provided by World Bank Group in its journal The World Bank Economic Review.

Volume (Year): 21 (2007)
Issue (Month): 1 ()
Pages: 1-20

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Handle: RePEc:oup:wbecrv:v:21:y:2007:i:1:p:1-20
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  1. Carroll Christopher Dixon, 2001. "Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(1), pages 1-38, April.
  2. Krusell, P & Smith Jr, A-A, 1995. "Income and Wealth Heterogeneity in the Macroeconomic," RCER Working Papers 399, University of Rochester - Center for Economic Research (RCER).
  3. Chris Elbers & Jan Willem Gunning, 2002. "Growth Regression and Economic Theory," Tinbergen Institute Discussion Papers 02-034/2, Tinbergen Institute.
  4. 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.
  5. Chris Elbers & Jan Willem Gunning, 2004. "Estimating Vulnerability," Development and Comp Systems 0408015, EconWPA.
  6. Binder, M. & Pesaran, M.H., 1996. "Stochastic Growth," Cambridge Working Papers in Economics 9615, Faculty of Economics, University of Cambridge.
  7. Levhari, David & Srinivasan, T N, 1969. "Optimal Savings under Uncertainty," Review of Economic Studies, Wiley Blackwell, vol. 36(106), pages 153-63, April.
  8. 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.
  9. Jan Willem Gunning & Paul Collier, 1999. "Explaining African Economic Performance," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 64-111, March.
  10. 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.
  11. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  12. Bliss, Christopher, 1999. "Galton's Fallacy and Economic Convergence," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 4-14, January.
  13. Chris Elbers & Jan Willem Gunning, 2002. "Growth Regression and Economic Theory," Tinbergen Institute Discussion Papers 02-034/2, Tinbergen Institute.
  14. Chris Elbers & Jan Willem Gunning, 2002. "Growth Regression and Economic Theory," Tinbergen Institute Discussion Papers 02-034/2, Tinbergen Institute.
  15. 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.
  16. Jan Willem Gunning & John Hoddinott & Bill Kinsey & Trudy Owens, 1999. "Revisiting forever gained: income dynamics in the resettlement areas of Zimbabwe," CSAE Working Paper Series 1999-14, Centre for the Study of African Economies, University of Oxford.
  17. Jan Willem Gunning & John Hoddinott & Bill Kinsey & Trudy Owens, 2000. "Revisiting forever gained: Income dynamics in the resettlement areas of Zimbabwe, 1983-96," Journal of Development Studies, Taylor & Francis Journals, vol. 36(6), pages 131-154.
  18. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
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