Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/190681 
Year of Publication: 
2018
Series/Report no.: 
Ruhr Economic Papers No. 780
Publisher: 
RWI - Leibniz-Institut für Wirtschaftsforschung, Essen
Abstract: 
Separating the effects of uncertainty from realised events, and identifying the welfare effects of uncertainty, present a number of empirical challenges. Combining individuallevel panel data from rural Ethiopia with high-resolution meteorological data, we introduce a new proxy for income uncertainty - mean-preserving rainfall variability - and estimate that an increase in income uncertainty is associated with reductions in objective consumption and subjective well-being (SWB). Furthermore, 86% of the effect on SWB is attributed to the direct effects of uncertainty, consistent with a model of optimal expectations (Brunnermeier and Parker, 2005). In addition, we find that farmers in more uncertain environments are more resilient to realised rainfall shocks, consistent with a trade-off between optimism about the future and risk-management investments today. These findings suggest that the gains from further consumption smoothing are likely greater than estimates based solely on realised consumption fluctuations.
Subjects: 
income uncertainty
consumption smoothing
subjective well-being
rainfall variability
JEL: 
I31
O13
Q12
Q56
Persistent Identifier of the first edition: 
ISBN: 
978-3-86788-908-7
Document Type: 
Working Paper

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