| Abstract: | How exposure to risk affects economic growth is a key issuein development. This article quantifies both the ex ante andex post effects of risk using long-running panel data for ruralhouseholds in Zimbabwe. It proposes a simulation-based econometricmethodology to estimate the structural form of a micro modelof household investment decisions under risk. The key findingis that risk substantially reduces growth in this particularsetting: the mean capital stock in the sample is (in expectation)46 percent lower than in the absence of risk. About two-thirdsof the impact of risk is due to the ex ante effect (that is,the behavioral response to risk), which is usually not takeninto account in policy design. These results suggest that policyinterventions that reduce exposure to shocks or that help householdsmanage risk could be much more effective than is commonly thought. |
