Where _X_ is a vector of aggregate variables and _E(Ch|X_ ) is the expected value of consumption, _Ch_ , conditional on vector of aggregate variables _X._ Here the first term in the right hand side represents the aggregate risk facing the household, while the second accounts for idiosyncratic risk.

# **Rural Vulnerability in Serbia—Empirical Model**

In this section we analyze rural vulnerability taking advantage of the panel structure in the Serbia SLS of 2002 and 2003. While the notion of vulnerability encompasses multiple dimensions, the focus of this study is on vulnerability to consumption poverty. We examine the impact of aggregate and household level variables such as the distribution of assets, access to physical and social goods and services and geographic factors on rural vulnerability. This study adopts the methodology developed by Ligon and Schechter (2003) to estimate the vulnerability of rural Serbians (see the empirical model in the next section).

Following the Ligon and Schechter (2003) framework presented above, we use a constant relative risk aversion (CRRA) utility function _U_ ( _C_ ) = ( _C_ 1 −θ ) 1( − θ ) with a relative risk aversion factor, θ = 2. Note that using equation (3) above, vulnerability is decomposed into poverty and risk components. Risk is further decomposed into aggregate risk, idiosyncratic risk and unexplained risk components. Furthermore, each components of vulnerability are regressed over the same set of explanatory variables as those used to estimate total vulnerability. . For the regressions, the two year averages of the explanatory variables (see below) are used since estimates of vulnerability and its components are the same for a given household at any given time.

# **Explanatory Variables and Descriptive Statistics**

In line with the main objective of the paper and the conceptual model presented in above, an extensive list of explanatory variables are used to examine the relative role of several individual, household, and community variables on rural household welfare. Household level variables included are demographic and educational variables, labor market participation and health status, main sources of income, physical and financial asset holdings, and household perception of its economic situation. Population age statistics from the 2002 Population census, regional consumer prices, local wages, and provincial dummies are used to capture regional heterogeneity and other factors beyond the control of individuals and households. These variables are commonly considered as determinants of household welfare in the literature.

Household level wage is measured by average wage paid per month per wage earning adult at the community level<sup>2</sup> , not by wage rates derived at individual level. Community-level average wages provide a better description of prevailing labor market conditions than individual-level wages,

> 2 Communities are defined as primary sampling units (PSUs) within a district as provided in the household survey design. As PSUs are levels at which random samples of households are drawn for the surveys, community level averages are assumed as good representatives of prevailing labor market conditions in their communities.

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