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Rainfall shocks and risk aversion: Evidence from Southeast Asia

Sabine Liebenehm, Nele Degener and Eric Strobl

TVSEP Working Papers from Leibniz Universitaet Hannover, Institute of Development and Agricultural Economics, Project TVSEP

Abstract: Empirical studies advocating the temporal variability of risk attitudes suggest that adverse covariate shocks significantly alter risk attitudes over time, but there is no consensus on the direction. In this paper, we investigate whether risk aversion increases or decreases in response to shocks. To do so, we combine individual-level panel data with historical rainfall data for rural Thailand and Vietnam. Our econometric analysis shows that temporal variability in risk attitudes is driven by rainfall shocks. Both severe shortages and excesses appear to increase individuals’ risk aversion. Contrary to expectations, we find that this impact is lower for farmers than for non-farmers. We can explain this result by the heterogeneous composition of non-farmers and by farmers’ ability to mitigate rainfall shocks. Our findings have potentially important implications especially for developing countries in that adverse shocks can increase poor people’s risk aversion and may lead to decisions that perpetuate their lives in poverty.

Keywords: Rainfall; Risk attitudes; Risk mitigation (search for similar items in EconPapers)
JEL-codes: C23 D9 Q54 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-agr, nep-dev, nep-sea and nep-upt
Date: 2018-04
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