The Welfare Impacts of Commodity Price Volatility: Evidence from Rural Ethiopia

Abstract

Many governments have tried to stabilize commodity prices based on the widespread belief that households in developing countries – especially poorer ones – value price stability, defined here as the lack of fluctuations around a mean price level. We derive a measure of multivariate price risk aversion as well as an associated measure of willingness to pay for price stabilization across multiple commodities. Using data from a panel of Ethiopian households, our estimates suggest that the average household would be willing to pay 6-32 percent of its income to eliminate volatility in the prices of the seven primary food commodities. Not everyone benefits from price stabilization, however. Contrary to conventional wisdom, the welfare gains from eliminating price volatility would be concentrated in the upper 40 percent of the income distribution, making food price stabilization a distributionally regressive policy in this context.

Keywords: Price Volatility, Price Stabilization, Price Risk, Risk and Uncertainty

JEL Classification: D13, D80, E64, O12, Q12