Wealth and Time Preference in Rural Ethiopia

Mahmud Yesuf and Randall Bluffstone

RFF Working Paper Series from Resources for the Future

Abstract: This study measured the discount rates of a sample of 262 farm households in the Ethiopian highlands, using a time preference experiment with real payoffs. In general, the median discount rate was very high—more than double the interest rate on the outstanding debt—and varied systematically with wealth and risk aversion. Although we do not have a good theory for explaining the linkage between rates-of-time preferences (RTPs) and risk aversion, our findings warn that these two aspects of household behavior reinforce each other and are easily confused. Our results have important implications for understanding households’ behavior. Because the RTPs were so high, what might seem like profitable investments from the outside might not seem so from the farmers’ perspectives. Furthermore, when future returns were uncertain, risk-averse decision makers favored projects with shorter payback periods and were less willing to invest in projects with long-term benefits. Formal capital market development, including lending and mortgage markets—currently non-existent in most of rural Ethiopia—may help reduce RTPs and cause more investments to be acceptable. The results also suggested the need for more research on the linkages between risk aversion and RTPs in low-income countries.

Keywords: Discounting; Ethiopian farm households; experimental studies; interval regression; time preference (search for similar items in EconPapers)
JEL-codes: C24 C93 D12 D91 Q12 Q21 (search for similar items in EconPapers)
Date: 2008-06-15
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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