Risk and intertemporal substitution: Livestock portfolios and off-take among Kenyan pastoralists

Travis J. Lybbert, John McPeak

Research output: Contribution to journalArticle

13 Scopus citations

Abstract

Most decisions involve variability in two dimensions: uncertainty across states of nature and fluctuations over time. The stakes involved in tradeoffs between these variability dimensions are especially high for the poor who have difficulty managing and recovering from shocks. We assume Epstein and Zin recursive preferences and estimate risk aversion and intertemporal substitution as distinct preferences using data from Kenyan herders. Results suggest that the assumption implicit in additive expected utility models that relative risk aversion (RRA) is the inverse of the elasticity of intertemporal substitution (EIS) is flawed. Specifically, our RRA and EIS estimates are consistent with a preference for the early resolution of uncertainty, which we believe is driven importantly by the instrumental value of early uncertainty resolution. This same preference pattern is consistent with asset smoothing in response to a dynamic asset threshold.

Original languageEnglish (US)
Pages (from-to)415-426
Number of pages12
JournalJournal of Development Economics
Volume97
Issue number2
DOIs
StatePublished - Mar 1 2012

Keywords

  • Asset dynamics
  • Elasticity of intertemporal substitution
  • Poverty
  • Recursive utility
  • Risk aversion

ASJC Scopus subject areas

  • Development
  • Economics and Econometrics

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