Long-term effects of risk and time preferences on households welfare in emerging market economies

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Economic theory suggests that risk aversion and time discounting should decline in wealth. As a conclusion, poorer households, especially in developing countries, are considered to be more risk averse and more impatient than wealthier households, which in turn lead the poorer to take management decisions that could perpetuate their lives in poverty. However, our understanding of the complex and dynamic interactions between risk and time preferences, risk management and poverty, especially in different dimensions of well-being, is still quite limited, because of data limitations and highly compartmentalized research methods. This research proposal applies a holistic approach, where the dynamic interrelations between risk and time preferences, risk management and the multiple dimensions of poverty will be disentangled in order to derive longer-term prospects for sustainable development of rural households in transition economies. The emerging market economy of Thailand, which has seen a considerable decline in poverty but remains strongly vulnerable to adverse risks, is a suitable stage to effectively investigate the dynamic interactions between preferences, risk management and poverty. The proposed research investigates these interactions by differentiating between two levels of risk management strategies, i.e. (i) risk management at the individual level such as diversifying income sources, and (ii) risk management at the group level such as sharing risks with other households in social networks. Drivers and impacts of risk management strategies at both levels are the objects of investigation. The investigation of drivers of risk management decisions will go beyond standard economic theory and incorporate alternative theories such as prospect theory and quasi-hyperbolic discounting. Among the impacts of risk management strategies, both monetary indicators and non-monetary indicators of well-being will be taken into account. The empirical foundations for the research are built upon the existing long-term panel data set of approximately 2000 households from rural Thailand over 5 waves from 2007 to 2013 collected within the scope of the DFG-FOR 756 project. In the proposed research the existing data base will be complemented by economic field experiments to elicit risk and time preferences and by collecting information on households social networks. With the extended long-term panel database our understanding of the dynamic interlinkages between risk and time preferences, risk management and multidimensional poverty can be significantly improved.