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Measuring risk by looking at changes in inequality : vulnerability in Ecuador

  • Ligon, Ethan

    ()

    (University of California, Berkeley. Dept of agricultural and resource economics)

We describe a measure of welfare, "vulnerability", which measures the difference between the highest feasible average level of utility in a population given aggregate resources, and the actual average level of utility. This measure can be decomposed into two components, related to inequality and to risk. We provide methods for computing vulnerability, inequality, and risk using only data on expenditures from repeated cross-sections of household data, and relate these to Atkinson's family of inequality measures. Using methods developed here and household-level Ecuadorean data from 1995 and 2006, we estimate the vulnerability and risk of �different population groups. Taking the population altogether, we find that the crisis of the late nineties was not only a large shock for the country as a whole, but also greatly increased the risk faced by individual households in the Sierra, risk which was subsequently translated into greater inequality. After 1999, overall risk borne by the average household fell dramatically, with the consequence that inequality remained nearly constant from 1999-2006. Levels of rural risk are considerably greater than are urban; further, rural risks tend to be the consequence of spatial shocks, while urban risks are much more idiosyncratic in nature.

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Paper provided by University of California at Berkeley, Department of Agricultural and Resource Economics and Policy in its series CUDARE Working Paper Series with number 1095.

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Length: 30 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:are:cudare:1095
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  1. Narayana R Kocherlakota & Luigi Pistaferri, 2005. "Asset Pricing Implications of Pareto Optimality with Private Information," Levine's Bibliography 784828000000000507, UCLA Department of Economics.
  2. Martin Biewen & Stephen P. Jenkins, 2006. "Variance Estimation for Generalized Entropy and Atkinson Inequality Indices: the Complex Survey Data Case," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(3), pages 371-383, 06.
  3. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 928-56, October.
  4. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
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  7. Bewley, Truman, 1977. "The permanent income hypothesis: A theoretical formulation," Journal of Economic Theory, Elsevier, vol. 16(2), pages 252-292, December.
  8. Ligon, Ethan & Laura Schechter, 2002. "Measuring Vulnerability," Royal Economic Society Annual Conference 2002 128, Royal Economic Society.
  9. Pritchett, Lant & Suryahadi, Asep & Sumarto, Sudarno, 2000. "Quantifying vulnerability to poverty - a proposed measure, applied to Indonesia," Policy Research Working Paper Series 2437, The World Bank.
  10. Jalan, Jyotsna & Ravallion, Martin, 1997. "Are the poor less well-insured? Evidence on vulnerability to income risk in rural China," Policy Research Working Paper Series 1863, The World Bank.
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  12. Townsend, R.M., 1991. "Risk and Insurance in Village India," University of Chicago - Economics Research Center 91-3, Chicago - Economics Research Center.
  13. Angus Deaton & Christina Paxson, 1993. "Intertemporal Choice and Inequality," NBER Working Papers 4328, National Bureau of Economic Research, Inc.
  14. Glewwe, Paul & Hall, Gillette, 1998. "Are some groups more vulnerable to macroeconomic shocks than others? Hypothesis tests based on panel data from Peru," Journal of Development Economics, Elsevier, vol. 56(1), pages 181-206, June.
  15. Deaton, Angus, 1985. "Panel data from time series of cross-sections," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 109-126.
  16. Hoddinott, John & Quisumbing, Agnes, 2003. "Methods for microeconometric risk and vulnerability assessments," Social Protection Discussion Papers 29138, The World Bank.
  17. Shubham Chaudhuri & Jyotsna Jalan & Asep Suryahadi, 2002. "Assessing household vulnerability to poverty from cross-sectional data: A methodology and estimates from Indonesia," Discussion Papers 0102-52, Columbia University, Department of Economics.
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