Community Research and Development Information Service - CORDIS

Periodic Report Summary 1 - RDHF (Risk and Development: Households and Firms)

Risk and uncertainty are fundamental drivers of economic decisions and in particular in developing countries for poor households and small firms. Vagaries of weather, health, demand, prices, etc. can determine extreme fluctuations in welfare and firm profits.
In this project we study how households insure against risk through networks of extended family members. The availability of such insurance device also fosters the investment in human and physical capital. In particular investment in non-collateralizable assets, such as children’s education, is a function of the resources available to the household through its sharing network as formal credit market would not be able to provide the necessary capital to that investment. In fact we find that extended family networks provide both insurance against shocks and support for the investment in human capital, therefore initiating a break in the cycle of poverty across generations. While agricultural household lacking other sources of insurance against the increase in the volatility of weather phenomena appear to take lower risk/lower return choices in terms of crop planting and cultivated land. This is potentially a successful income smoothing device, however this strategy, as any low risk strategy, doesn’t allow specialization and therefore diminishes the profitability of the activity and limits the ability of the households to exit poverty in a permanent way.

In a similar fashion, small firms in developing countries are often unable to optimally operate as they lack fundamental knowledge of business practices including accounting. We provided such knowledge through teaching and find that firms whose owners have attended such training classes fare much better than similar firms in terms of profits, clients served, and revenues. These effects appear to be substantial and don’t seem to disappear after a short period of time.
At the same time many of the unsuccessful small entrepreneurs in developing countries seem to be entrepreneurs out of necessity rather than because of inclination and skills.

In summary, in this research project we provide evidence of the relevance of risk in shaping the economic behavior of households and firms.

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Life Sciences
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