Working Paper 311 - Risk, Returns, and Welfare
Linden McBride and
Working Paper Series from African Development Bank
The relationship among risk, returns, and welfare has important implications for the reproduction of inequality and persistent poverty and therefore is critical to understand for effective anti-poverty policy making. We use unsupervised learning methods to identify the productive asset portfolios available in the Tanzanian economy 2008-2013 and then use Antle’s (1983) moments approach to estimate the first three moments of the consumption-based distribution of returns to those asset portfolios. Finally, we nonparametrically estimate the relationship among initial wealth, expected returns, and the risk premium of each of the identified asset portfolios. Our analysis identifies three distinct asset portfolios within the data–one based on business and human capital assets and two based on agricultural assets. We find evidence of a relationship between initial asset holdings, expected returns, and risk across, but not within, portfolios.Keywords: Risk, Returns, Assets, Welfare, Tanzania
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