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The paper analyzes the economic impacts of climate change-induced fluctuations on the performance of Ethiopia's agriculture, using a countrywide computable general equilibrium (CGE) model. We model the impacts on agriculture using a Ricardian model, where current agricultural production is modelled as a function of temperature and precipitation, among other things, and where future agriculture is assumed to follow the same climate function. The effect of overall climate change is projected to be relatively benign until approximately 2030, but will become considerably worse thereafter. Our simulation results indicate that, over a 50-year period, the projected reduction in agricultural productivity may lead to reductions in average income of some 20 per cent compared with the outcome that would have prevailed in the absence of climate change. This indicates that adaptation policies -both government planned and those that ease autonomous adaptation by farmers -will be crucial for Ethiopia's future development.

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Risk aversion has generally been found to decrease in income. This may lead one to expect that people in poor countries will be more risk averse than inhabitants of rich countries. Recent comparative findings with students suggest the opposite, potentially giving rise to a risk-income paradox. Findings with students, however, may result from selection effects. We test whether a paradox indeed exists by measuring the risk preferences of over 500 household heads across several regions in the highlands of Ethiopia. We do so using certainty equivalents, which are well suited to the task due to their simplicity. We find high degrees of risk tolerance, consistent with the evidence obtained for students using the same tasks. In particular, the level of risk tolerance is higher than the one found for student samples in most Western and even middle income countries. We also find risk tolerance to increase in income proxies within our sample, thus completing the paradox.