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Growth and Risk: Methodology and Micro Evidence

Author

Listed:
  • Chris Elbers

    (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)

  • Jan Willem Gunning

    (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)

  • Bill Kinsey

    (Faculty of Economics and Business Administration, Vrije Universiteit Amsterdam)

Abstract
This discussion paper resulted in a publication in the 'World Bank Economic Review', 2007, 21, 1-20. 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. This is, we believe, the first micro-based estimate of the effect of shocks on growth. 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 effectiveness of policy interventions which reduce exposure to shocks or help households in risk man!agement may be seriously underestimated.

Suggested Citation

  • Chris Elbers & Jan Willem Gunning & Bill Kinsey, 2003. "Growth and Risk: Methodology and Micro Evidence," Tinbergen Institute Discussion Papers 03-068/2, Tinbergen Institute, revised 19 Sep 2006.
    • Handle: RePEc:tin:wpaper:20030068
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    growth; risk; Ramsey model; convergence.;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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