Shocks and Stability of Risk and Time Preferences among Poor Rural Households in Ethiopia

Abstract

This paper examines the effects of shocks on temporal stability of risk and time preferences of rural households within a developing country context characterized by frequent droughts, chronic food insecurity, and low levels of education. Leveraging a three-wave large and diverse household panel data that elicits preferences every two years for more than 6,500 individuals from over 5,600 sample rural households in Ethiopia, we analyze the effects of droughts (self-reported) and rainfall shortfalls on household risk and time preferences. Our findings show that households become more risk-averse and impatient after experiencing drought and rainfall shocks; the change in risk preferences is more notable among households that experience recurrent droughts and multiple covariate shocks during the same period.