Standard poverty measures miss the welfare costs of risk. We construct a vulnerability measure that decomposes welfare losses into poverty and risk components, and find they play roughly equal roles in Bulgaria.

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Abstract

We construct a measure of vulnerability which permits us to decompose the welfare loss associated with living in a risky environment. This decomposition lets us separately measure the welfare loss due to poverty and the welfare loss due to risk from different sources. Applying this decomposition to a panel dataset from Bulgaria, we find that poverty and risk play roughly equal roles in reducing welfare. Aggregate shocks are more important than idiosyncratic sources of risk, but households headed by an employed, educated male are less vulnerable to aggregate shocks than are other households.

BibTeX

@Article{	  ligon-schechter03,
  author	= {Ethan Ligon and Laura Schechter},
  title		= {Measuring Vulnerability},
  journal	= {Economic Journal},
  year		= 2003,
  volume	= 113,
  number	= 486,
  pages		= {C95--C102},
  doi		= {10.1111/1468-0297.00117}
}