Growth and Risk: Methodology and Micro Evidence

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

How exposure to risk affects economic growth is a key issue in development. This article quantifies both the ex ante and ex post effects of risk using long-running panel data for rural households in Zimbabwe. It proposes a simulation-based econometric methodology to estimate the structural form of a micro model of household investment decisions under risk. The key finding is that risk substantially reduces growth in this particular setting: the mean capital stock in the sample is (in expectation) 46 percent lower than in the absence of risk. About two-thirds of the impact of risk is due to the ex ante effect (that is, the behavioral response to risk), which is usually not taken into account in policy design. These results suggest that policy interventions that reduce exposure to shocks or that help households manage risk could be much more effective than is commonly thought. © 2007 Oxford University Press.
Original languageEnglish
Pages (from-to)1-20
Number of pages20
JournalWorld Bank Economic Review
Volume21
DOIs
Publication statusPublished - 2007

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methodology
evidence
Methodology
panel data
behavioral response
econometrics
Zimbabwe
economic growth
simulation
household
Household
exposure
effect
policy

Cite this

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title = "Growth and Risk: Methodology and Micro Evidence",
abstract = "How exposure to risk affects economic growth is a key issue in development. This article quantifies both the ex ante and ex post effects of risk using long-running panel data for rural households in Zimbabwe. It proposes a simulation-based econometric methodology to estimate the structural form of a micro model of household investment decisions under risk. The key finding is that risk substantially reduces growth in this particular setting: the mean capital stock in the sample is (in expectation) 46 percent lower than in the absence of risk. About two-thirds of the impact of risk is due to the ex ante effect (that is, the behavioral response to risk), which is usually not taken into account in policy design. These results suggest that policy interventions that reduce exposure to shocks or that help households manage risk could be much more effective than is commonly thought. {\circledC} 2007 Oxford University Press.",
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Growth and Risk: Methodology and Micro Evidence. / Elbers, C.T.M.; Gunning, J.W.; Kinsey, B.H.

In: World Bank Economic Review, Vol. 21, 2007, p. 1-20.

Research output: Contribution to JournalArticleAcademicpeer-review

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AU - Gunning, J.W.

AU - Kinsey, B.H.

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AB - How exposure to risk affects economic growth is a key issue in development. This article quantifies both the ex ante and ex post effects of risk using long-running panel data for rural households in Zimbabwe. It proposes a simulation-based econometric methodology to estimate the structural form of a micro model of household investment decisions under risk. The key finding is that risk substantially reduces growth in this particular setting: the mean capital stock in the sample is (in expectation) 46 percent lower than in the absence of risk. About two-thirds of the impact of risk is due to the ex ante effect (that is, the behavioral response to risk), which is usually not taken into account in policy design. These results suggest that policy interventions that reduce exposure to shocks or that help households manage risk could be much more effective than is commonly thought. © 2007 Oxford University Press.

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