Measuring Risk Preferences in Rural Ethiopia: Risk Tolerance and Exogenous Income Proxies

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Discussion papers of the WZB serve to disseminate the research results of work in progress prior to publication to encourage the exchange of ideas and academic debate. Inclusion of a paper in the discussion paper series does not constitute publication and should not limit publication in any other venue. The discussion papers published by the WZB represent the views of the respective author(s) and not of the institute as a whole. Terms of use: Documents inWissenschaftszentrum Berlin für Sozialforschung gGmbH Reichpietschufer 50 10785 Berlin Germany www.wzb.eu AbstractMeasuring risk preferences in rural Ethiopia: Risk tolerance and exogenous income proxies by Ferdinand M. Vieider, Abebe Beyene, Randall Bluffstone, Sahan Dissanayake, Zenebe Gebreegziabher, Peter Martinsson and Alemu Mekonnen * Risk aversion has generally been found to decrease in income or wealth. This may lead one to expect that poor countries will be more risk averse than rich countries. Recent comparative findings with students, however, suggest the opposite, giving rise to a riskincome paradox. We test this paradox by measuring the risk preferences of over 500 household heads spread over the highlands of Ethiopia. We do so using certainty equivalents, which have rarely been used in developing countries, but permit us to relate the findings to a host of evidence from the West. We find high degrees of risk tolerance, in agreement with the student comparisons finding higher risk tolerance in poorer countries. We also find risk tolerance to increase in income proxies, thus completing the paradox. We thereby use income proxies that can be considered as exogenous, allowing us to conclude that at least part of the causality must run from income to risk tolerance. We furthermore provide extensive methodological discussions on measuring and estimating risk preferences in development settings.

The Improved Biomass Stove Saves Wood, but How Often Do People Use It? Evidence from a Randomized Treatment Trial in Ethiopia

“…We do not suggest that this is necessarily the right explanation. As discussed in Yesuf and Bluffstone (2009) and Vieider et al (2014) estimated risk aversion is a function of wealth, income and market failures. The negative coefficient estimate may therefore be picking up such omitted variables.…”

“…The measure used in this paper is simply the average certainty equivalent for the seven choice tasks. For a detailed description of the data, see Vieider et al (2014).…”

“…Achieving this goal would imply that roughly half the households in Ethiopia would use improved biomass stoves. The so-called MIRT injera 2 stove, which is currently being promoted in Ethiopia, and is the focus of this paper, has been found to use approximately 30% less wood to cook a typical meal in the field (Gebreegziabher et al, 2014).…”

A Conceptual Framework for Modeling Social Risk Tolerance for PPP Projects: An Empirical Case of China

“…Social risks are related to industrial sectors and human behaviors, implying that SRT contains a behavioral preference. Some scholars have stated that social risks usually occur in the financial [30], cultural [31], medical [32], and manufacturing sectors and that the definition of relevant concepts should account for the differences in industrial backgrounds. Previous studies have also ascribed social risks to the interactions between teenagers [6], per capita income [33], and citizen crime [34], indicating that SRT should be as specific as possible.…”