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Article
Measuring Risk Preferences in Rural Ethiopia: Risk Tolerance and Exogenous Income Proxies
Economics Faculty Publications and Presentations
  • Ferdinand M. Vieder, University of Reading
  • Abebe D. Beyene, Environmental Economics Policy Forum for Ethiopia
  • Randall Bluffstone, Portland State University
  • Sahan T.M. Dissanayake, Portland State University
  • Zenebe Gebreegziabher, Colby College
  • Peter Martinsson, University of Gothenburg
  • Alemu Mekonnen, Addis Ababa University
Document Type
Working Paper
Publication Date
11-1-2015
Subjects
  • Risk-taking (Psychology) -- Economic aspects -- Ethiopia,
  • Risk-taking (Psychology) -- Developing countries,
  • Experimental design
Disciplines
Abstract

Risk-aversion has generally been found to decrease in income. This may lead one to expect that poor countries will be more risk-averse than rich countries. Recent comparative findings with students suggest the opposite, potentially giving rise to a risk-income paradox. Findings with students, however, may result from selection effects. We test whether a paradox indeed exists by measuring the risk preferences of over 500 household heads representative of the highlands of Ethiopia. We find high degrees of risk tolerance, consistent with the evidence obtained for students. We also find risk tolerance to increase in income proxies, thus completing the paradox. Using plausibly exogenous income proxies allows us to conclude that part of the causality must run from income to risk tolerance. It also avoids problems with measurement of income in developing countries that may have led to attenuation bias in some studies. Our findings further suggest that risk preferences cannot be blamed for the failure to adopt new technologies. Alternative explanations are discussed.

Persistent Identifier
https://archives.pdx.edu/ds/psu/25949
Citation Information
Vieider, Ferdinand, Abebe Beyene, Randall Bluffstone, Sahan Dissanayake, Zenebe Gebreegziabher, Peter Martinsson, and Alemu Mekonnen. "Measuring Risk Preferences in Rural Ethiopia: Risk Tolerance and Exogenous Income Proxies." (2015).