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Title Optimal Expectations and the Welfare Cost of Climate Variability
Full text http://hdl.handle.net/2077/34624
Date 2013
Author(s) Alem, Yonas; Colmer, Jonathan
Abstract Uncertainty about the future is an important determinant of well-being, especially in developing countries where financial markets and other market failures result in ineffective insurance mechanisms. However, separating the effects of future uncertainty from realised events, and then measuring its impact on utility presents a number of empirical challenges. This paper addresses these issues and shows that increased climate variability (a proxy for future income uncertainty) reduces farmers' subjective well-being, consistent with the theory of optimal expectations (Brunnermeier & Parker, 2005), using panel data from rural Ethiopia and a new data set containing daily atmospheric parameters. The magnitude of our result indicates that a one standard deviation (7%) increase in climate variability has an equivalent effect on life satisfaction to a two standard deviation (1-2%) decrease in consumption. This effect is one of the largest determinants of life satisfaction in rural Ethiopia. - JEL classification: C25; D60, I31
Language eng
Relation Working Papers in Economics; 578
Type of publication report
Identifier 1403-2465
Repository Gothenberg - University of Gothenberg
Added to C-A: 2014-01-15;12:13:58