Dynamics, Risk, and Vulnerability

29 Pages Posted: 28 Feb 2011

See all articles by Ethan A. Ligon

Ethan A. Ligon

University of California, Berkeley; Giannini Foundation

Date Written: February 27, 2001

Abstract

Recent research on household ‘vulnerability’ has led to an increased appreciation of the welfare costs of risk. Measuring the risk borne by a particular household has generally involved the use of panel data, and in particular the use of time series variation in household expenditures to estimate the risk borne by the household in any given period. This has led researchers to focus on static measures of vulnerability, since once used to identify the distribution of consumption expenditures in a single period the time series variation can no longer be used to describe the inter-temporal profile of the distribution of consumption expenditures - simultaneous estimation of inequality, risk, and time series variation in household vulnerability requires the additional structure of a dynamic model. Unfortunately, our present understanding of the economic circumstances in which most households are situated seems too limited to permit general agreement on what the right dynamic model is. We show that simple restrictions on households’ inter-temporal smoothing can be used to simultaneously estimate household risk preferences in a manner which is robust to a variety of different assumptions about the economic environment. Further, these simple restrictions and estimated preferences can then be used to robustly characterize the welfare costs of different sorts of variation in consumption expenditures.

Suggested Citation

Ligon, Ethan A., Dynamics, Risk, and Vulnerability (February 27, 2001). Available at SSRN: https://ssrn.com/abstract=1769938 or http://dx.doi.org/10.2139/ssrn.1769938

Ethan A. Ligon (Contact Author)

University of California, Berkeley ( email )

207 Giannini Hall #3310
Berkeley, CA 94720-3310
United States

Giannini Foundation

UC Davis
Davis, CA 95616
United States

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