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Growth and Risk: Methodology and Micro Evidence

  • Chris Elbers

    (Free University Amsterdam)

  • Jan Willem Gunning

    (Free University Amsterdam)

  • Bill Kinsey

    (Free University Amsterdam)

There has been a revival of interest in the effect of risk on economic growth. We quantify both ex ante and ex post effects of risk using a stochastic version of the Ramsey model. We develop a simulation-based econometric methodology which allows us to estimate the model in the structural form suggested by theory. The methodology is applied to micro data from a remarkable long-running panel data set for rural households in Zimbabwe. We find that risk substantially reduces growth: in the ergodic distribution the mean (across households) capital stock is 46% lower than in the absence of risk. About two-thirds of the impact of risk is due to the ex ante effect (i.e. the behavioral response to risk) which is usually not taken into account in policy design. Our results suggest that the e¤ectiveness of policy interventions which reduce exposure to shocks or help households in risk management may be seriously underestimated.

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File URL: http://econwpa.repec.org/eps/dev/papers/0408/0408014.pdf
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Paper provided by EconWPA in its series Development and Comp Systems with number 0408014.

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Length: 34 pages
Date of creation: 13 Aug 2004
Date of revision:
Handle: RePEc:wpa:wuwpdc:0408014
Note: Type of Document - pdf; pages: 34
Contact details of provider: Web page: http://econwpa.repec.org

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