Temporal Stability of Risk Attitudes and the Impact of Adverse Shocks—A Panel Data Analysis from Thailand and Vietnam

Abstract

Summary Exogenous negative shocks and intrinsic risk attitudes are two important elements characterizing the vicious cycle of poverty associated with rural households in developing countries. Recent empirical studies suggest that adverse shocks—a key driver of poverty—can trigger substantial changes in the risk attitudes of poor people, leading to decisions that perpetuate their lives in poverty. Although the temporal variability of risk attitudes is a controversial topic, the literature advocating the temporal variability of risk attitudes suggests that covariate shocks, such as natural disasters, alter risk attitudes over time, whereas idiosyncratic shocks show no such significant impact. This paper aims to test the temporal stability of risk attitudes in rural households in Thailand and Vietnam to determine whether this pattern—covariate shocks that affect risk attitudes and idiosyncratic shocks that do not—can be confirmed for these households. I use an exogenous measure of shocks to explain temporal variation in risk attitudes. Thus, I estimate variation in consumption using a multilevel model in which variation in consumption at the individual level serves as a proxy for idiosyncratic shocks, while variation in consumption at the aggregate level is used to measure covariate shocks. My study finds temporal variability in risk attitudes that is driven by covariate shocks in Vietnam and—in contrast to past research—by idiosyncratic shocks in Thailand. The results suggest that Vietnamese respondents may be better in insuring idiosyncratic risks for example through safety nets, while mutual insurance across individuals does not seem to work well in Thailand. In addition, results indicate that the mutual insurance problem in Thailand seems to increase in wealth. The differences that I find between Thailand and Vietnam and across poverty types correspond to the difference in political systems and consequently the focus of socio-political measures. Thailand’s recent political volatility and the growing lack of social cohesion in Thai society support these findings.