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Dynamics, risk, and vulnerability

  • Ligon, Ethan A.

Recent research on household `vulnerability' has led to an increased appreciation of the welfare costs of risk. Measuring the risk borne by a particular household has generally involved the use of panel data, and in particular the use of time series variation in household expenditures to estimate the risk borne by the household in any given period. This has led researchers to focus on static measures of vulnerability, since once used to identify the distribution of consumption expenditures in a single period the time series variation can no longer be used to describe the intertemporal profile of the distribution of consumption expenditures--simultaneous estimation of inequality, risk, and time series variation in household vulnerability requires the additional structure of a dynamic model. Unfortunately, our present understanding of the economic circumstances in which most households are situated seems too limited to permit general agreement on what the right dynamic model is. We show that simple restrictions on households' intertemporal smoothing can be used to simultaneously estimate household risk preferences in a manner which is robust to a variety of different assumptions about the economic environment. Further, these simple restrictions and estimated preferences can then be used to robustly characterize the welfare costs of different sorts of variation in consumption expenditures.

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Paper provided by Department of Agricultural & Resource Economics, UC Berkeley in its series Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series with number qt8kw7k2dz.

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Date of creation: 01 Feb 2011
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Handle: RePEc:cdl:agrebk:qt8kw7k2dz
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  1. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  2. Hansen, Lars Peter & Heaton, John & Yaron, Amir, 1996. "Finite-Sample Properties of Some Alternative GMM Estimators," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 262-80, July.
  3. Robert M. Townsend, . "Risk and Insurance in Village India," University of Chicago - Population Research Center 91-3a, Chicago - Population Research Center.
  4. Ligon, Ethan & Schechter, Laura, 2004. "Evaluating different approaches to estimating vulnerability," Social Protection Discussion Papers 30159, The World Bank.
  5. Guido W. Imbens & Phillip Johnson & Richard H. Spady, 1995. "Information Theoretic Approaches to Inference in Moment Condition Models," NBER Technical Working Papers 0186, National Bureau of Economic Research, Inc.
  6. Kocherlakota, Narayana & Pistaferri, Luigi, 2005. "Asset Pricing Implications of Pareto Optimality with Private Information," CEPR Discussion Papers 4930, C.E.P.R. Discussion Papers.
  7. Ligon, Ethan & Laura Schechter, 2002. "Measuring Vulnerability," Royal Economic Society Annual Conference 2002 128, Royal Economic Society.
  8. Narayana R. Kocherlakota, 2005. "Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation," Econometrica, Econometric Society, vol. 73(5), pages 1587-1621, 09.
  9. Hoddinott, John & Quisumbing, Agnes, 2003. "Methods for microeconometric risk and vulnerability assessments," Social Protection Discussion Papers 29138, The World Bank.
  10. Ligon, Ethan, 1998. "Risk Sharing and Information in Village Economics," Review of Economic Studies, Wiley Blackwell, vol. 65(4), pages 847-64, October.
  11. Hassan, Fareed M. A. & Peters, R. Kyle, Jr., 1995. "Social safety net and the poor during the transition : the case of Bulgaria," Policy Research Working Paper Series 1450, The World Bank.
  12. Rogerson, William P, 1985. "Repeated Moral Hazard," Econometrica, Econometric Society, vol. 53(1), pages 69-76, January.
  13. Runkle, David E., 1991. "Liquidity constraints and the permanent-income hypothesis : Evidence from panel data," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 73-98, February.
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