Risk Attitudes and Returns in Rural Economies: Evidence from Thailand and Vietnam
Department of Agricultural and Resource Economics
University of Saskatchewan
Wednesday, October 23, 2019
Taylor-Hibbard Seminar Room (Rm103)
12:00 pm-1:15 pm
Risk attitudes play an important role in the transformation process of traditional farm households to business entities in rural areas of emerging market economies. In addition, these household live in risky environments and are exposed to a myriad of adverse events. Recent empirical studies suggest that covariate shocks trigger substantial changes in poor people’s risk attitudes. If shocks increase risk aversion, a negative feedback loop may result, as poor and risk-averse people are likely to invest in low-risk and low-return activities, increasing the likelihood that they will remain below the poverty line. Empirical evidence on this negative feedback loop is, however, scant. In this paper, we investigate whether and to what extent changes in risk attitudes that were caused by adverse shocks lead to changes in economic decision-making. Our analysis is based on a unique 10 years panel data set from rural Thailand and Vietnam. The data set includes information on individual risk attitudes and investment behavior of approximately 2,000 households. We combine this data set with historical rainfall data at village level. This combination allows us to empirically investigate whether variations in economic behavior can be explained by variations in risk attitudes that were triggered by rainfall shocks. Our results show that increases in risk aversion that were driven by shocks are associated with low return investments. We can also show that the negative effect is more severe among the relatively poor than among the relatively wealthy. The results suggest empirical evidence on the existence of a negative feedback loop between adverse shocks, risk aversion and poverty.