Growth and Risk: Methodology and Micro Evidence

Tinbergen Institute Discussion Paper No. 2003-068/2

34 Pages Posted: 2 Oct 2003

See all articles by Chris Elbers

Chris Elbers

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Jan Willem Gunning

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Bill H. Kinsey

Vrije Universiteit Amsterdam, School of Business and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 2003

Abstract

There has been a revival of interest in the effect of risk on economic growth. We quantify both ex ante and ex post effects of risk using a stochastic version of the Ramsey model. We develop a simulation-based econometric methodology which allows us to estimate the model in the structural form suggested by theory. The methodology is applied to micro data from a remarkable long-running panel data set for rural households in Zimbabwe. We find that risk substantially reduces growth: in the ergodic distribution the mean (across households) capital stock is 46% lower than in the absence of risk. This is, we believe, the first micro-based estimate of the effect of shocks on growth. About two-thirds of the impact of risk is due to the ex ante effect (i.e. the behavioral response to risk) which is usually not taken into account in policy design. Our results suggest that the effectiveness of policy interventions which reduce exposure to shocks or help households in risk man! agement may be seriously underestimated.

Keywords: growth, risk, Ramsey model, convergence

JEL Classification: D10, D91, C51, O12

Suggested Citation

Elbers, Chris and Gunning, Jan Willem and Kinsey, Bill H., Growth and Risk: Methodology and Micro Evidence (July 2003). Tinbergen Institute Discussion Paper No. 2003-068/2. Available at SSRN: https://ssrn.com/abstract=441140 or http://dx.doi.org/10.2139/ssrn.441140

Chris Elbers (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Jan Willem Gunning

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+ 310 20 444 6141 (Phone)
+ 310 20 444 6004 (Fax)

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Bill H. Kinsey

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 (0)20 44 46144 (Phone)

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