Economic literature has established the importance of risk attitudes in economic decision making. The study examines determinants of risk aversion in children. It also explores the potential of the government to mitigate the effect of shocks, by looking at the effectiveness of the world’s largest public works program – National Rural Employment Guarantee Scheme (NREGS). First, it builds a general model of the determinants of childhood risk aversion. The study finds that the environment – economic and psychological, that a child is born into plays an important role in developing the non-cognitive skill - preference for risk. Additionally, economic shocks do not have a significant impact on risk aversion in childhood years vis-a vis psychological trauma. Second, the study investigates whether NREGS has been effective in smoothing income shocks for rural households as would be reflected by less risk averse children. NREGS has been effective in providing a stable environment to children resulting in lower risk aversion. Access to the scheme reduced risk aversion in the Indian sample by 36- 43%. The study employs OLS and Probit models using Young Lives Round 3 (2009-10) cross-section data from Andhra Pradesh, India, since the risk questions were only asked in that round. Identification is difficult using only cross-section data, so I am only able to establish correlations. Further, the Young Lives dataset contains a rich set of control variables, and Propensity Matching is used to correct for self-selection into the NREGS. A series of reliability test have also been conducted to ensure the robustness of results.
Paper submitted in partial fulfillment of the requirements for the Degree of Master of Science in Economics for Development at the University of Oxford.
Sweta Gupta. NREGs - Correcting for the &#8216;Accident&#8217; of Birth? A Study of the Determinants of Risk Aversion in Andhra Pradesh, India. University of Oxford, Oxford, UK (2013) 34 pp.