democracy volatility and economic development growth stability is an important objective because development requires sustained increases in income because volatility is costly for the poor and because volatility deters growth we study the determinants of average growth and its volatility as a two equation system and find that higher levels of democracy and diversification lower volatility whereas volatility itself reduces growth muslim countries instrument for democracy and measures of diversification identify volatility in contrast to the lack of consensus on the democracy growth relationship the democracy stability link is robust rather than focus on growth this paper forges an alternative link between democracy and development through the volatility channel

credit market constraints consumption smoothing and the accumulation of durable production assets in low income countries investments in bullocks in india in this paper we formulate and estimate a finite horizon structural dynamic model of agricultural investment behavior that incorporates the major features of low income agricultural environments income uncertainty constraints on borrowing and rental markets and the use of investment assets to generate income and smooth consumption the model is fit to longitudinal indian household data on farm profits bullock stocks and pump sets the estimated structural parameters are used to assess the effects on the life cycle accumulation of bullocks agricultural profits and welfare associated with complete markets and bullock liquidity and with second best policies that provide assured sources of income to farmers and weather insurance

consumption vulnerability to risk in rural pakistan abstract as one of the dimensions of vulnerability this paper empirically investigates the inability of rural dwellers to cope with negative income shocks a variable coefficient regression model is applied to a two period household panel dataset collected in the north west frontier province pakistan an area with high incidence of income poverty and low human development the empirical model allows for a different ability to smooth consumption approximated by a linear function of households attributes and controls for the endogeneity of observed changes in income using qualitative information on subjective risk assessment estimation results show that the ability to cope with negative income shocks is lower for households that are aged landless and do not receive remittances regularly

estimating households vulnerability to idiosyncratic and covariate shocks a novel method applied in madagascar households in developing countries are frequently hit by severe idiosyncratic and covariate shocks leading to high consumption volatility a household s currently observed poverty status might therefore not be a good indicator of the household s general vulnerability to poverty in the recent years there has been an emerging literature on the concept and empirical analysis of vulnerability but because of strong data requirements for vulnerability analysis and limited availability of panel and shock data for developing countries static poverty analysis still dominates empirical vulnerability studies in this paper we propose a simple method to empirically assess the impact of idiosyncratic and covariate shocks on households vulnerability which can be applied in a wide context as it relies on more commonly available cross sectional or short panel data we empirically illustrate our approach for madagascar we show that covariate shocks have a relatively higher impact on rural households whereas idiosyncratic shocks have a relatively higher impact on urban households vulnerability

consumption smoothing and the welfare consequences of social insurance in developing economies studies of risk in developing economies have focused on consumption fluctuations as a measure of the value of insurance a common view in the literature is that the welfare costs of risk and benefits of social insurance are small if income shocks do not cause large consumption fluctuations we present a simple model showing that this conclusion is incorrect if the consumption path is smooth because individuals are highly risk averse hence social safety nets could be valuable in low income economies even when consumption is not very sensitive to shocks

assessing the case for social experiments rs ecent academic debates pit two alternative approaches to policy evaluation against one another the first is the experimental approach based on the random assignment of accepted program applicants to a recipient or treatment group and a non recipient or control group the second is the nonexperimental or econometric approach that uses a variety of microdata sources statistical methods and behavioral models to compare the outcomes of participants in social programs with those of nonparticipants the central question addressed in this paper is whether or not randomized social experiments aid in securing answers to basic questions about the evaluation of social programs there are many distinct and complementary approaches to the study of the impact of public policy including full general equilibrium analysis of policy impacts tinbergen 1956 auerbach and kotlikoff 1987 shoven and whalley 1992 kydland and prescott 1991 and less ambitious partial equilibrium microeconomic structural research programs such as those designed to estimate the impact of taxes on labor supply both approaches offer answers to many interesting counterfactual policy questions but their credibility rests critically on the quality of the empirical input used to generate their answers

long term consequences of short term precipitation shocks evidence from brazilian migrant households we find that large short term precipitation shocks damage the long term income of households that have permanently migrated from rural to urban areas this outcome is consistent with the behavior of credit constrained rural households who are willing to accept lower long term income in urban areas following the depletion of their productive assets during an adverse shock our empirical evidence suggests that there may be a link between large precipitation shocks in rural areas and urban poverty further exploration is warranted on the mechanisms by which natural disasters cause these long term losses

risk pooling between households and risk coping measures in developing countries evidence from rural bangladesh abstract using data from rural bangladesh i test whether income risks are pooled among villagers between neighboring households and between related households living in different villages i find evidence that risks to food consumption are pooled between neighboring households and between related households but not among villagers as for nonfood consumption i find little evidence of risk pooling except between unrelated neighboring households i also find that while households belonging to a neighborhood network do not take any special measures during an economic hardship those not belonging to any such network try to smooth consumption by selling off livestock and other assets and by getting interest free loans negative income shocks are found to have little effect on labor supply or private transfers

behavioral responses to risk in rural china does risk perpetuate poverty in a credit constrained economy jalan and ravallion study portfolio and other behavioral responses to measured risk using household panel data for rural china one quarter of wealth is held in unproductive liquid forms but only a small share of this appears to be a precaution against income risk the authors estimate that eliminating income risk would reduce the share of wealth held in liquid form by less than 1 percentage point moreover that effect is confined largely to middle income groups high income households do not it seems need to hold unproductive cautionary wealth and the poor probably cannot afford to do so the authors find no evidence that income risk discourages schooling but risk does inhibit the out migration of labor generally the results provide only limited support for the idea that uninsured risks promote unproductive portfolio behavior in this setting there is such an effect but it is small in magnitude and cannot be deemed an important cause of poverty

impact of off farm income on food expenditures in rural bangladesh an unconditional quantile regression approach this study examines the effects of off farm income on food expenditures of rural bangladeshi households our analysis yields unbiased estimates of the unconditional impact of off farm income on food expenditures and reveals the heterogeneous effects that occur across the distribution of total food consumption expenditures the findings suggest that the impacts of off farm income are uniformly positive across the unconditional quantile regression and significantly increase food consumption expenditures for all quantiles except for the 25th quantile in addition we found that schooling experience and location of the household increase the food expenditures of rural households most importantly this article argues that female headed rural households in which the female works off the farm tend to have significantly lower food expenditures

are there dynamic gains from a poor area development program poor area development programs in which the government transfers extra resources to unusually poor areas have been widely used to fight poverty there has been some research on such programs but little is known about their impact on household living standards over time the authors address the issue for a sizable poor area development program in rural china china s program had a significant impact on rural living standards in the targeted areas of the sample the consumption growth model suggests that households living in the targeted areas had a higher rate of consumption growth than one would have otherwise expected nonetheless the authors found that while the gains in growth were enough to prevent an absolute decline in average living standards they were not enough to reverse the strong underlying divergent tendencies in the rural economy

precautionary behavior migrant networks and household consumption decisions an empirical analysis using household panel data from rural china abstract we develop a test of precautionary behavior in the consumption decisions of rural agricultural households among surveyed households facing a median level of consumption risk 10 of savings can be attributed to a precautionary motive and this increases to 15 for households with consumption per capita below the poverty line we next use distant lags of local rainfall shocks uncorrelated with current consumption growth to identify the size of migrant networks outside the village and then present evidence that both poor and nonpoor households engage in less precautionary saving as the size of the village migrant network increases

poverty and household size the widely held view that larger families tend to be poorer in developing countries has influenced research and policy the scope for size economies in consumption cautions against this view we find that the correlation between poverty and size vanishes in pakistan when the size elasticity of the cost of living is about 0 6 this turns out to be the elasticity implied by a modified version of the food share method of setting scales by contrast some measures of child nutritional status indicate an elasticity of unity consideration of the weight attached to child versus adult welfare may help resolve the non robustness of demographic profiles of poverty excerpt

long term impacts of droughts on labour markets in developing countries evidence from brazil abstract climate shocks have well documented impacts on the short term welfare of rural households in developing countries we investigate the impact of droughts on brazilian labour markets we find long term rural wage losses beyond the immediate impact of the drought with affected workers taking five years to catch up with their peers findings are robust to model specification the severity of the losses varies with the dependence on agricultural income supporting the notion of diversifying portfolio strategies in rural areas to reduce climate related income risk

household consumption smoothing through ethnic ties evidence from cote d ivoire abstract this paper investigates the hypothesis that households in cote d ivoire take part in spatially diversified risk sharing arrangements with members of their own ethnic group empirical tests are presented using several estimation methods to deal with heteroscedasticity measurement error and extreme value problems to examine whether results are robust across estimation procedures the hypothesis of complete risk sharing within ethnic groups is rejected however there appears to be some partial insurance performed by individual households with other members of the same ethnic group particularly for the households residing in the regions least likely to have access to formal financial arrangements

income shocks consumption wealth and human capital evidence from russia abstract using the russia longitudinal monitoring survey this article investigates how russian households consumption responds to income shocks and in particular how household wealth and human capital affect the households ability to smooth consumption an instrumental variable estimation method with household fixed effects is implemented after correcting for potential problems of sample attrition using the inverse probability weighting method the article finds that household consumption in russia is only partially protected from idiosyncratic shocks the analysis also provides evidence that wealthier households can better smooth their consumption furthermore changes in income have less impact on consumption when households have members with higher education levels wealth effects are more pronounced in rural areas while education effects are stronger for urban households

distribution and growth in models of imperfect capital markets abstract a full analysis of the distribution of income should include both the inequality in income between different generations of the same family what is usually called intergenerational ocial mobility and the inequality in income between different families in the same generation becker tomes 1979 p 1154

arsenic mitigation in bangladesh a household labor market approach rural families in bangladesh one of the poorest countries in the world face financial risks from major illness both from the cost of medical care and from the loss of income associated with reduced labor supply and productivity chronic exposure to arsenic in drinking water has often been associated with the development of skin cancers and internal cancers especially of the bladder liver and lungs and a wide variety of other health conditions such as diabetes respiratory problems cardiovascular diseases hyperpigmentation hypopigmentation and keratosis a condition in which painful nodules grow on the palms of the hands and soles of the feet most of the economic work on arsenic contamination in bangladesh has had an epidemiological focus that has tried to effectively monetize a dose response relation using either a cost of illness or a willingness to pay approach

income smoothing and consumption smoothing one way that risk averse households protect consumption levels is to borrow and use insurance mechanisms another way common in low income economies is to diversify economic activities and make conservative production and employment choices households thus tend toward limiting exposure only to shocks that can be handled with available credit and insurance typically both types of mechanisms are studied independently but much more can be learned by studying them together first we obtain a more complete picture of risks costs and insurance possibilities second it opens the way to considering biases in standard tests of credit and insurance

informal risk sharing in an infinite horizon experiment author s charness gary b genicot garance abstract this paper presents the first laboratory study of risk sharing without commitment our experiment captures the main features of a simple model of voluntary insurance between two agents in the model two individuals interact over a potential infinite horizon and suffer random income shocks risk averse individuals have incentives to smooth consumption by making transfers to each other these transfers being voluntary only self enforcing risk sharing arrangements are possible transfers can never be so large as to tempt individuals to renege on them this constraint when binding has strong implications for the shape of the constrained optimal risk sharing arrangement in our experiment participants are matched in pairs each period one of them randomly drawn receives a given amount in addition to its regular income after observing both incomes each person in a pair chooses a non negative transfer to make to the other person two features of the experimental design are crucial first it is common information that all pairs will be dissolved at the end of each period with a given probability participants are informed when this occurs and randomly re matched this replicates the effect of infinite horizon and discounting in the model second at the end of the experiment a single period is randomly drawn to count for cash payment this feature is essential for individuals to care about the utility outcome of each period we find evidence generally consistent with risk sharing with most transfers coming from individuals who received h in the period moreover in support of the theory transfers are much higher with a higher continuation probability and they also are highly correlated with the individual s degree of risk aversion however while the model predicts an increase in transfers with ex ante inequality we observe the opposite effect this may reflect considerations of identity or group membership

a heterogeneous agent model of credit linked index insurance and farm technology adoption abstract protection from downside risk is a determinant of technology uptake among subsistence agricultural households access to credit insurance and savings may stimulate technology adoption where new methods are riskier but higher yielding or require sunk costs in this paper we employ a dynamic stochastic heterogeneous agent model where farm households have access to contingent credit and make savings technology and loan repayment choices our approach is novel as insurance is modeled as a meso level product where the bank is indemnified before any payouts are distributed to borrowers thus it accounts for both supply and demand side concerns showing a flow of effects when index insurance contracts are sold to risk aggregators for whom basis risk is lower results show letting the lender lay first claim on indemnities lowers default which can decrease interest rates and expand credit access insurance and savings may also spur technology uptake

consumption insurance an evaluation of risk bearing systems in low income economies the hypothesis of full risk sharing can be taken to data from low income countries and evaluate formal and informal financial systems in many contexts idiosyncratic risks are high so credit insurance arrangements could be beneficial statistical tests reveal that households in southern india take advantage of these possibilities villages in cote d ivoire and countries in thailand do not do as well the paper includes an empirical description of the devices used to smooth consumption and a theoretical discussion of private information and incentives on ideal operating systems the full information and mechanism design frameworks provide benchmarks for policy analysis

pricing strategies who leads and who follows in the air and rail passenger markets in italy abstractin this paper we aim at empirically uncovering the existence of price leadership in the passenger transport market whose oligopolistic structure facilitates the strategic interaction amon

wealth weather risk and the composition and profitability of agricultural investments despite the growing evidence that farmers in low income environments are risk averse there has been little empirical evidence on the importance of risk in shaping the actual allocation of production resources among farmers differentiated by wealth the authors use panel data on investments in rural india to examine how the composition of productive and nonproductive asset holdings varies across farmers with different levels of total wealth and across farmers facing different degrees of weather risk income variability is a prominent feature of the experience of rural agents in low income countries the authors report evidence based on measures of rainfall variability that the agricultural investment portfolio behavior of farmers in such settings reflects risk aversion due evidently to limitations on consumption soothing mechanisms such as crop insurance or credit markets the authors results suggest that uninsured weather risk is a significant cause of lower efficiency and lower average incomes a one standard deviation decrease in weather risk measured by the standard deviation of the timing of the rainy season would raise average profits by up to 35 percent among farmers in the lowest wealth quartile moreover rainfall variability induces a more unequal distribution of average incomes for a given distribution of wealth wealthier farmers are willing to absorb significant risk without giving up profits to reduce production risk smaller farmers have to invest their limited wealth in ways that reduce their exposure to risk at the cost of lower profit rates the authors found that at high levels of rainfall variability differences in rates of profit per unit of agricultural assets were similar across classes of wealth but over the sample range of rainfall variability these rates of profit were always higher for the poorer farmers than for the wealthier ones suggesting that the disadvantages of small farmers in risk diffusion are more than offset by their labor cost advantage

is informal risk sharing less effective for the poor risk externalities and moral hazard in mutual insurance abstract poor farm households are less keen to adopt high risk high return technologies than rich households yet the poor are more vulnerable to income shocks we develop a model of endogenous risk taking to explain these facts in autarky poor households adopt less risky production plans and obtain lower expected returns but face higher relative risk than the rich the introduction of risk sharing generates negative risk externalities between agents at the first best the social planner imposes a homogeneous level of risk taking in the group at the second best risk taking is not enforceable and increases with insurance generating moral hazard interestingly the poor s risk taking behavior is more sensitive to insurance the social planner thus mitigates risk taking by applying a lower insurance coverage in poor groups the introduction of risk sharing therefore reinforces the gap between rich and poor in terms of expected income and absolute risk while the effect on relative risk is ambiguous

escaping poverty and becoming poor who gains who loses and why abstract different households have followed very different economic trajectories this study of 35 north indian villages shows members of 11 1 of 6 376 households in these villages have overcome poverty in the last 25 years while members of another 7 9 have fallen into poverty households escape from poverty is assisted by one set of factors but an entirely different set of factors is associated with households decline two distinct sets of policies are required thus one set to promote escape from poverty and another set to arrest decline into poverty poverty has some distinctly local antecedents a methodology for tracking changes in poverty at the local level is developed that community groups and others can use to assess change and examine causes

risk and insurance in village india comment the protection of poor households in high risk agrarian economies from shocks to their incomes has often been seen as a compelling motive for various forms of policy intervention including transfers of cash or food credit subsidies and public employment schemes for a survey see lipton and ravallion 1995 the desirability of such safety net policies clearly depends on how well pre existing risk sharing arrangements work while it is commonly thought that without effective policy intervention rural households are vulnerable to village wide shocks such as adverse prices or poor rains it is less clear to what extent risk sharing institutions within the village mitigate the effects of idiosyncratic income risk stemming for instance from ill health or localized crop damage 2 several recent papers have used household level data to implement tests of risk sharing that might inform such concerns 3 these tests are based on the proposition that with perfect risk sharing consumption at the household level should be insured against idiosyncratic risks and thus depend solely on the realization of the aggregate risk wilson 1968 diamond 1967 townsend 1994 tests this implication of perfect intra village risk sharing using longitudinal household data on consumptions and incomes for three villages in india he reports that the full insurance hypothesis provides a surprisingly good benchmark in that household consumptions co move and do not appear to be much influenced by contemporaneous own income our aim here is to examine the robustness of this potentially important finding we have two main concerns the first is that the specification townsend adopts potentially biases his test towards the null hypothesis of full insurance because it yields inconsistent estimates of the key test parameter under a plausible alternative we therefore estimate a different specification that generates consistent estimates under both the null and the alternative our second concern is that a particular form of measurement error in the consumption data townsend uses may have further biased his results toward the null hypothesis of full insurance to address this concern we use an instrumental variables procedure when we implement the test of consumption insurance with townsend s consumption data we also re estimate the test equations with a measure of consumption derived from the same underlying primary data by an alternate method finally townsend reports 1discussions with robert townsend stimulated our interest in this investigation the staff of the

the design of auctions and tenders with quality thresholds the symmetric case three designs of auctions with quality thresholds are considered the quality threshold is not known with certainty by the bidders in one scheme quality plans submitted by potential bidders are evaluated first and price bids for only those plans which have been approved are invited the second scheme has price bids first to yield a priority for scrutinising quality a third has simultaneous decisions on price and quality the model yields an equivalence result the use of reserve prices to produce social optimality is then investigated the theory is used to discuss the recent auction for uk television franchises

a simple test of consumption insurance are consumers effectively insured against idiosyncratic shocks to income or wealth either by formal institutions such as charities private insurance and government programs or by informal mechanisms such as gifts and loans from relatives friends and neighbors under full insurance consumption growth should be cross sectionally independent of idiosyncratic variables that are exogenous to consumers this proposition is tested by cross sectional regressions of consumption growth on a variety of exogenous variables full insurance is rejected for long illness and involuntary job loss but not for spells of unemployment loss of work due to strike and an involuntary move

one kind of freedom poverty dynamics in post apartheid south africa abstract a 1993 south african living standards survey documented the legacy of apartheid in the form high levels of inequality and human insecurity drawing on a 1998 re survey of households in the 1993 study this paper explores whether this legacy has been superseded or whether apartheid s end has been only one kind of freedom that has left households in a poverty trap from which they cannot escape after proposing a theoretically grounded dynamic poverty typology that distinguishes stochastic from structural poverty transitions the paper goes on to estimate that significant numbers of the south african poor are potentially trapped in a structural poverty trap and lack the means to escape poverty over time

group formation in risk sharing arrangements we study informal insurance within communities explicitly recognizing the possibility that subgroups of individuals may destabilize insurance arrangements among the larger group we therefore consider self enforcing risk sharing agreements that are robust not only to single person deviations but also to potential deviations by subgroups however such deviations must be credible in the sense that the subgroup must pass exactly the same test that we apply to the entire group it must itself employ some self enforcing risk sharing agreement we observe that the stability of subgroups is inimical to the stability of the group as a whole two surprising consequences of this analysis are that stable groups have uniformly bounded size a result in sharp contrast to the individual deviation problem and that the degree of risk sharing in a community is generally non monotonic in the level of uncertainty or need for insurance in the community

the potential of land rental markets in the process of economic development evidence from china abstract we develop a model of land leasing with agents characterized by unobserved heterogeneity in ability and presence of an off farm labor market in this case decentralized land rental may contribute to equity and efficiency goals and may have several advantages over administrative reallocation the extent to which this is true empirically is explored using data from three of china s poorest provinces land rental markets and administrative reallocation reallocate land to those with lower endowments but the former are more effective in doing so and have a bigger productivity enhancing effect information on hypothetical market participation suggests that reducing transaction costs in land rental markets could help to realize significant additional productivity gains

identifying vulnerability to poverty a critical survey in the economic literature on poverty various methods have been proposed for measuring a phenomenon known as vulnerability however after more than a quarter century of research no consensus has been reached on how to identify such vulnerable individuals within a given population some misunderstandings have also arisen from the overlapping of other closely related concepts such as the expectation of being poor expected poverty multi period poverty and risk exposure this paper offers a detailed conceptual discussion on vulnerability to poverty and its related elements reviewing a wide range of identifying criteria provided in the literature it is found that according to the state of the art in this field of research two key elements stand out in identifying vulnerable individuals an expected well being below the poverty line and a relevant risk of falling into poverty due to downside deviation from a reference level of well being the traditional classification of vulnerability approaches has been updated into four groups i those that stress the element of exposure to risk ii those that emphasize the element of expected poverty iii those that define vulnerability through a utility gap and iv those that are supported by a mean risk dominance criterion

are the poor less well insured evidence on vulnerability to income risk in rural china the authors test how well consumption is insured against income risk in a panel of sampled households in rural china they estimate the risk insurance models by generalized method of moments treating income and household size as endogenous insurance exists for all wealth groups although the hypothesis of perfect insurance is universally rejected those in the poorest wealth decile are the least well insured with 40 percent of an income shock being passed on to current consumption by contrast consumption by the richest third of households is protected from almost 90 percent of an income shock the extent of insurance in a given wealth stratum varies little between poor and nonpoor areas