Development Babies

42 Pages Posted: 7 Dec 2017 Last revised: 24 Dec 2017

See all articles by Remy Levin

Remy Levin

University of Connecticut

Daniela Vidart

University of California, San Diego (UCSD)

Date Written: December 23, 2017

Abstract

We empirically investigate how macroeconomic experiences shape individual attitudes towards risk and time in a developing country context with rapid and volatile economic change. To do so, we link a large longitudinal data set from Indonesia, containing repeat measurements of risk aversion and patience, with province-level real GDP growth statistics. We exploit variation between cohorts, within cohort over time, and within cohort in the cross-section, allowing us to better control for unobserved individual and cohort heterogeneity. Our results indicate that macroeconomic experiences shape risk and time preferences differently. Measured risk aversion changes in response to experienced growth volatility, with individuals living through more volatile economic times becoming more risk averse. This effect declines in magnitude by age at first measurement, consistent with "formative years'' theories of preference formation, and is much stronger for men. In contrast, we find weak evidence that measured patience changes in response to average experienced growth, with individuals living through more rapidly improving economic times becoming less patient on average. We further investigate whether the observed effects are driven by changes in beliefs or constraints, or by other factors highlighted in the literature, such as exposure to violence or natural disasters. When doing so we find that changes in measured patience can be accounted for primarily by changes in income and inflation expectations, but that changes in measured risk aversion are not entirely driven by these or other factors. Our results suggest the existence of a hitherto unknown behavioral channel for the effects of macroeconomic policy.

Keywords: endogenous preference formation, risk aversion, patience, experience hypothesis, development, Indonesia

JEL Classification: D8, D9, E2, O1, Z1

Suggested Citation

Levin, Remy and Vidart, Daniela, Development Babies (December 23, 2017). Available at SSRN: https://ssrn.com/abstract=3081333 or http://dx.doi.org/10.2139/ssrn.3081333

Remy Levin (Contact Author)

University of Connecticut ( email )

Storrs, CT 06269-1063
United States

Daniela Vidart

University of California, San Diego (UCSD) ( email )

9500 Gilman Drive
Mail Code 0502
La Jolla, CA 92093-0112
United States

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