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The World Bank Economic Review Advance Access originally published online on January 4, 2007
The World Bank Economic Review 2007 21(1):1-20; doi:10.1093/wber/lhl008
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© The Author 2007. Published by Oxford University Press on behalf of the International Bank for Reconstruction and Development / THE WORLD BANK. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org

Growth and Risk: Methodology and Micro Evidence

Chris Elbers, Jan Willem Gunning, and Bill Kinsey

Correspondence: jgunning{at}feweb.vu.nl

JEL codes: D10, D91, C51, O12

How exposure to risk affects economic growth is a key issue in development. This article quantifies both the ex ante and ex post effects of risk using long-running panel data for rural households in Zimbabwe. It proposes a simulation-based econometric methodology to estimate the structural form of a micro model of household investment decisions under risk. The key finding is that risk substantially reduces growth in this particular setting: the mean capital stock in the sample is (in expectation) 46 percent lower than in the absence of risk. About two-thirds of the impact of risk is due to the ex ante effect (that is, the behavioral response to risk), which is usually not taken into account in policy design. These results suggest that policy interventions that reduce exposure to shocks or that help households manage risk could be much more effective than is commonly thought.

All three authors are with the Department of Economics, Free University, Amsterdam. Their email addresses are celbers{at}feweb.vu.nl, jgunning{at}feweb.vu.nl (corresponding author), and bkinsey{at}feweb.vu.nl.


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