Stochastic Wealth Dynamics and Risk Management Among a Poor Population

Cornell University Applied Economics and Management Working Paper No. 2002-44

48 Pages Posted: 6 Sep 2003

See all articles by Travis J. Lybbert

Travis J. Lybbert

University of California, Davis - Department of Agricultural and Resource Economics

Christopher B. Barrett

Cornell University - Charles H. Dyson School of Applied Economics & Management

Solomon Desta

Utah State University - College of Natural Resources

D. Layne Coppock

Utah State University - College of Natural Resources

Date Written: December 2002

Abstract

The literature on economic growth and development has focused considerable attention on questions of risk management and the possibility of multiple equilibria associated with poverty traps. We use herd history data collected among pastoralists in southern Ethiopia to study stochastic wealth dynamics among a very poor population. These data yield several novel findings. Although covariate rainfall shocks plainly matter, household-specific factors, including own herd size, account for most observed variability in wealth dynamics. Despite longstanding conventional wisdom about common property grazing lands, we find no statistical support for the tragedy of the commons hypothesis. It appears that past studies may have conflated costly self-insurance with stocking rate externalities. Such self-insurance is important in this setting because weak livestock markets and meager social insurance cause wealth to fluctuate largely in response to biophysical shocks. These shocks move households between multiple dynamic wealth equilibria toward which households converge following nonconvex path dynamics. The lowest equilibrium is consistent with the notion of a poverty trap. These findings have broad implications for the design of development and relief strategies among a poor population extraordinarily vulnerable to climatic shocks.

Keywords: common property, covariate risk, Ethiopia, idiosyncratic risk, poverty traps, social insurance

JEL Classification: O1, Q12

Suggested Citation

Lybbert, Travis J. and Barrett, Christopher B. and Desta, Solomon and Coppock, D. Layne, Stochastic Wealth Dynamics and Risk Management Among a Poor Population (December 2002). Cornell University Applied Economics and Management Working Paper No. 2002-44, Available at SSRN: https://ssrn.com/abstract=431260 or http://dx.doi.org/10.2139/ssrn.431260

Travis J. Lybbert

University of California, Davis - Department of Agricultural and Resource Economics ( email )

One Shields Avenue
Davis, CA 95616
United States

Christopher B. Barrett (Contact Author)

Cornell University - Charles H. Dyson School of Applied Economics & Management ( email )

315 Warren Hall
Ithaca, NY 14853-7801
United States
607-255-4489 (Phone)
607-255-9984 (Fax)

HOME PAGE: http://aem.cornell.edu/faculty_sites/cbb2/

Solomon Desta

Utah State University - College of Natural Resources ( email )

Logan, UT 84322-5230
United States
435-797-3095 (Phone)
435-797-3796 (Fax)

D. Layne Coppock

Utah State University - College of Natural Resources ( email )

Logan, UT 84322-5230
United States
435-797-1262 (Phone)
435-797-3796 (Fax)

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