Many existing measures of vulnerability lack a theoretical basis. In
this paper we propose to measure vulnerability rigorously as the welfare
of a household which solves an intertemporal optimisation model under
risk. In such models, in essence a stochastic version of the Ramsey
model, an important part of chronic poverty may be caused by the ex
ante response of households to risks. Our simulation results indicate
that whether or not a household is to be classified as vulnerable
depends strongly on the time horizon considered. We use the model to
assess the accuracy of existing regression-based vulnerability measures.
We find that these methods can be vastly improved by including asset
measures in the regression.
Estimating vulnerability, presented at Staying Poor: Chronic Poverty and Development Policy, Institute for Development Policy and Management, University of Manchester, 7-9 April 2003. Chronic Poverty Research Centre (CPRC), Manchester, UK, 28 pp.