Abstracts of Kurosaki's English Publications, 2

Abstract: In 2001, a scheme called Citizen Community Board (CCB), a kind of community-based organization (CBO), was introduced in Pakistan, under which local people propose to the local government development projects through forming a CCB and upon approval the local government funds 80% of the project cost. Since 2001, however, both the number of CCBs and that of approved projects have been below the expected level. This raises a concern that the Pakistani society with limited historical experience in CBO-based development is too handicapped for the CCB scheme to be successful. Since 2004, JICA (Japan International Cooperation Agency) has been implementing a project to make the CCB program more effective and efficient, with Hafizabad District as a target district. This paper first summarizes the results of statistical analyses regarding the determinants of successful formation of a CCB and those of successful development activities conditional on the formation. This is based on the data we collected in a benchmark survey before JICA's intervention. The regression results show that rules within a CCB and the type of leadership are key to the success of CCB initiative, suggesting that the capacity building of CCBs and local communities is important. Then in the second part of the paper, we summarize the achievements of JICA's intervention during the year 2005-06. Our experiences show the effectiveness of field facilitators, supporting the view that the capacity building is indeed the constraint.

Abstract:This paper attempts to quantify the ill-effects of covariate shocks such as natural disasters on the sustainability of microfinance. The vulnerability of microfinance to covariate shocks is well-known theoretically and in anecdotes, but very few quantitative evidence exists. For our attempt, we use a unique dataset of about 3,000 micro-borrower households covering over a period of 1994-2006 including the event of a disastrous earthquake in Pakistan. Based on the difference-in-difference approach, contrasting regions that were hit by the earthquake and regions that were not, we found that the delay in repayment in the affected areas was 52% higher than that in the unaffected areas. The observed difference in the repayment delay was decomposed into changes in borrowers' composition and borrowers' behavior. The decomposition result shows that the changes in borrowers' behavior accounted for a large portion of the difference, suggesting a serious difficulty faced by borrowers and microfinance institutions in the earthquake-hit regions.

Abstract: We propose a new methodological framework to empirically analyze the dynamics of growth, poverty, and inequality that incorporates the fact that the entire distribution of a welfare indicator, say, real per-capita consumption, changes over time, and that empirical variables for growth, poverty, and inequality are often compiled from the distribution of the welfare indicator. Empirical models derived from this framework are applied to a unique panel dataset of provinces in the Philippines (1985-2003) and Thailand (1988-2004), compiled from microdata on household expenditures. The system GMM estimation results suggest that inequality reduced the subsequent growth rate of per-capita consumption in both countries and differences in inequality explain a substantial portion of the Philippine-Thai difference in growth and poverty reduction during the late 1980s and the 1990s.

Abstract: This paper investigates the effects of weather risk on the off-farm labor supply of agricultural households in a developing country. Faced with the uninsurable risk of output and food price fluctuations, poor farmers in developing countries may diversify labor allocation across activities in order to smooth income in real terms. A key feature of this paper is that it distinguishes different types of off-farm labor markets: agriculture and non-agriculture on the one hand, and, wages paid in cash and wages paid in kind on the other. We develop a theoretical model of household optimization, which predicts that when farmers are faced with more production risk in their farm production, they find it more attractive to engage in non-agricultural work as a means of risk diversification, but the agricultural wage sector becomes more attractive when food security is an important issue for the farmers and agricultural wages are paid in kind. To test this prediction, we estimate a multivariate two-limit tobit model of labor allocation using household data from rural areas of Bihar and Uttar Pradesh, India. The regression results show that the share of the off-farm labor supply increases with weather risk, the increase is much larger in the case of non-agricultural work than in the case of agricultural wage work, and the increase is much larger in the case of agricultural wages paid in kind than in the cash wage case. Simulation results based on the regression estimates show that the sectoral difference is substantial, implying that empirical and theoretical studies on farmers' labor supply response to risk should distinguish between the types of off-farm work involved.

Abstract: This paper examines the relationships among credit constraint, mothers' labor supply and children's time allocation in rural Andhra Pradesh, India, where a high prevalence of child labor poses serious problems. We estimate determinants of time allocation among children and of the gender gap between girls and boys in various activities treating both credit constraint and mothers' labor supply as endogenous variables. As expected, boys spend longer time in school than do girls, while girls spend longer time on household chores than do boys. When mothers increase their labor supply, however, the gender gap in children's time allocation (esp. schooling) does not appear to be affected significantly. We also find that a binding credit constraint significantly reduces children's schooling and leisure time and increases their domestic work time, but that the gender gap in children's time allocation (esp. schooling) appears to be smaller in credit-constrained households than in unconstrained households.

Abstract: In this paper, we investigate the gap between the first goal of Millennium Development Goals (MDGs) and the actual allocation of grant aid in the late 1990s, in order to obtain insights on necessary policy adjustments to achieve the goal. As a theoretical framework, we extend the poverty targeting framework of Besley and Kanbur (1988) by considering multiple donors and possible strategic interactions among them. We also incorporate the agency aspects of donor-recipient relationships elaborated by the recent aid literature such as Azam and Laffont (2003) and Svensson (2000, 2003). As an empirical analysis, we employ detailed data on grant aid allocation of eleven major aid donor countries and on aid disbursement of six international institutions such as the IBRD, IDA, and the UN organizations. Three main empirical results have emerged. First, in the late 1990s, grant allocations of Canada, Finland, Japan, the Netherlands, Norway, Sweden, and U.K. were consistent with the necessary condition of the optimal poverty targeting. Second, we found that there is a negative population scale effect for aid allocations, suggesting that strategic motives may also exist. Finally, the overall results for multilateral donors indicate allocation patterns consistent with the theory of poverty targeting.

Abstract: There is an emerging consensus that lack of credit is a major cause of child labor and inequality in the intrahousehold distribution of resources. At the same time, patterns in how children spend their time appear to be strongly influenced by maternal employment decisions. This paper includes an assessment of the effect of credit constraints on maternal employment and that of maternal employment on the intrahousehold allocation of labor, a nexus which has been left unexplored by existing studies. Three findings emerge: (1) a mother is more likely to work outside when a household lacks resources, and her domestic labor can be easily replaced by other members, (2) credit market accessibility is a major determinant of maternal labor, and (3) elder daughters assume a large part of the burden of maternal employment by providing domestic labor. Under binding credit constraints, results of this study support the collective as opposed to the unitary model of households.

Abstract: Data collected from rural India was used to examine the rules governing intrahousehold resource allocations. Testing for gender-age discrimination among household members using Deaton (1989)'s method, results suggest a general bias favoring boys over girls in allocation of consumption goods, however, the findings are not always statistically significant. Intrahousehold resource allocation rules are then examined to see if such discrimination is based on unanimous decision of parents. The novelty in our test on allocation rule are: (1) use of grandparental variables as extra-household environmental parameters (EEP's) in expenditure estimation, (2) derivation of a test of the unitary model that only requires EEP's, and (3) semi-formal use of survival status of grandparents in testing collective models. It is interesting yjay spouse's father characteristics are importantly correlated with greater mother and child goods expenditure shares, and smaller father goods shares. Their survival status matters, and this is a stronger evidence for collective as opposed to unitary model.

Abstract: This paper empirically analyzes the determinants of child labor and school enrollment in rural Andhra Pradesh, India. A village fixed-effect logit model for each child is estimated with the incidence of child labor or school enrollment as the dependent variable, in order to investigate individual and household characteristics associated with the incidence. Among the determinants, this paper focuses on whose education matters most in deciding the status of each child, an issue not previously investigated in the context of the joint family system. The regression results show that the education of the child's mother is more important in reducing child labor and in increasing school enrollment than that of the child's father, the household head, or the spouse of the head. The effect of the child's mother is similar on boys and girls while that of the child's father is more favorable on boys.

Abstract: As one of the measures to smooth income, this paper focuses on the diversification of labor allocation across activities. A key feature of this paper is that it pays particular attention to differences in the covariance between weather risk and agricultural wages and between weather risk and non-agricultural wages, incorporating household considerations of food security. We estimate a multivariate tobit model of labor allocation using household data from rural areas of Bihar and Uttar Pradesh, India. The regression results show that the share of the off-farm labor supply increases with the weather risk, and the increase is much larger in the case of non-agricultural wage work than in the case of agricultural wage work. Simulation results based on the regression estimates show that the sectoral difference is substantial, implying that empirical and theoretical studies on farmers' labor supply response to risk should distinguish between the types of off-farm work involved.

Abstract: In 2001, a scheme called Citizen Community Board (CCB), a kind of community-based organization (CBO), was introduced in Pakistan, under which local people propose to the local government development projects through forming a CCB and upon approval the local government funds 80% of the project cost. Since 2001, however, both the number of CCBs and that of approved projects have been below the expected level. This raises a concern that the Pakistani society with limited historical experience in CBO-based development is too handicapped for the CCB scheme to be successful. This paper addresses this concern through quantifying the determinants of successful formation of a CCB and those of successful development activities conditional on the formation. The regression results using a cross-section dataset in a district in Pakistan Punjab in 2004-05 suggest that the rules within a CCB and the type of leadership are key to the success of CCB initiatives.

Abstract: In this paper, the concept of vulnerability of the poor�fs welfare and its practical measures are scrutinized in order to derive implications for targeting poverty reduction policies toward vulnerable households. As illustration, various measures of vulnerability proposed in the literature are applied to a panel dataset collected in rural Pakistan. The empirical results show that different vulnerability rankings can be obtained depending on the choice of the measure. By utilizing these measures, we can identify who and which region is more vulnerable to a particular type of risk. This kind of information is useful in targeting poverty reduction policies. Since the nature of vulnerability is diverse, it is advisable to use the whole vector of various vulnerability measures.

Abstract: Myanmar's agricultural economy has been under transition from a planned to a market system since the late 1980s and has experienced a substantial increase in production. However, little research is available on the impact of economic policies in this country on agricultural production decisions and rural incomes. Therefore, this paper investigates the impact using a micro dataset collected in 2001 and covering more than 500 households in eight villages with diverse agro-ecological environments. Regression analyses focusing on within-village variations in cropping patterns show that the acreage share under non-lucrative paddy crops was higher for farmers who were under tighter control of the local administration due to their political vulnerability. Simulation results based on the regression estimates show that the loss in rural incomes due to farmers' being forced to grow too much paddy was not negligible.

Abstract: This paper develops an agency model of contract choice in the hiring of labor and then uses the model to estimate the determinants of contract choice in rural Myanmar. As a salient feature relevant for the agricultural sector in a low income country such as Myanmar, the agency model incorporates considerations of food security and incentive effects. It is shown that when, possibly due to poverty, food considerations are important for employees, employers will prefer a labor contract with wages paid in kind (food) to one with wages paid in cash. At the same time, when output is responsive to workers' effort and labor monitoring is costly, employers will prefer a contract with piece-rate wages to one with hourly wages. The case of sharecropping can be understood as a combination of the two: a labor contract with piece-rate wages paid in kind. The predictions of the theoretical model are tested using a cross-section dataset collected in rural Myanmar through a sample household survey which was conducted in 2001 and covers diverse agro-ecological environments. The estimation results are consistent with the theoretical predictions: wages are more likely to be paid in kind when the share of staple food in workers' budget is higher and the farmland on which they produce food themselves is smaller; piece-rate wages are more likely to be adopted when work effort is more difficult to monitor and the farming operation requires quick completion.

Abstract: The present paper investigates the measurement of transient poverty when each person's welfare level fluctuates due to exogenous risk. The paper namely characterizes the sensitivity of transient/chronic poverty decomposition with respect to the poverty line and to the expected welfare level so that the decomposition analysis will be based on solid theoretical foundations and be robust empirically. Theoretical results show that poverty measures associated with prudent risk preferences perform better than other measures in assuring that the value of transient poverty increases with the depth of chronic poverty and that the decomposition is not highly sensitive to the poverty line. Poverty measures such as those associated with constant relative risk aversion are thus superior to popular Foster-Greer-Thorbecke (FGT) measures such as headcount, poverty gap, and squared poverty gap indices. These theoretical arguments are confirmed empirically by the application of the decomposition to a two-period household panel dataset from rural Pakistan. The relative magnitudes of transient versus chronic poverty are more robust to changes in the poverty line when poverty measures associated with constant relative risk aversion are used than when FGT poverty measures are used.

Abstract: Based on a production dataset that corresponds to the current borders of India and Pakistan for the period c.1900-2000 and a district-level dataset from West Punjab for a similar period, this paper investigates the performance of agriculture in these regions. The growth records of agricultural production and shifts in crop mix indices show that changes in aggregate land productivity can be associated structurally with inter-crop and inter-district reallocations of land use. In the studied regions, cropping patterns of subsistence agriculture changed substantially, with a rising concentration of crop acreage in districts with higher productivity and shifts to more lucrative crops. These changes reflected comparative advantage and contributed to the improvement of aggregate land productivity. The crop concentration indices were at their highest levels in the early 2000s both in India and in Pakistan, showing the effects of agricultural liberalization policies and farmers' response to these policies.

Abstract: This paper looks at the case of Myanmar in order to investigate the behavior and welfare of rural households in an economy under transition from a planned to a market system. Myanmar's case is particularly interesting because of the country's unique attempt to preserve a policy of intervention in land transactions and marketing institutions. A sample household survey that we conducted in 2001, covering more than 500 households in eight villages with diverse agro-ecological environments, revealed two paradoxes. First, income levels are higher in villages far from the center than in villages located in regions under the tight control of the central authorities. Second, farmers and villages that emphasize a paddy-based, irrigated cropping system have lower farming incomes than those that do not. The reason for these paradoxes are the distortions created by agricultural policies that restrict land use and the marketing of agricultural produce. Because of these distortions, the transition to a market economy in Myanmar since the late 1980s is only a partial one. The partial transition, which initially led to an increase in output and income from agriculture, revealed its limit in the survey period.

Abstract: This paper investigates how to characterize each person's poverty status when his/her welfare level fluctuates and how to aggregate the status into chronic and transient poverty measures. The contribution of the paper is to clarify the sensitivity of relative magnitudes of chronic versus transient poverty to the choice of a poverty measure. We show this by theoretically re-examining Ravallion's (1988) decomposition of the expected value of a poverty measure into chronic and transient components. The examination covers major poverty measures including those developed by Foster et al. (1985), which are used extensively in the existing studies. Our analysis shows that the chronic-transient decomposition using the squared poverty gap index might be too sensitive to the poverty line and that the index is justified only if we accept that the welfare cost of consumption fluctuation is independent of the depth of chronic poverty. If we instead believe that the decomposition should not be too sensitive to the poverty line and that the welfare cost of risk is more severe when an individual's chronic poverty is deeper, other poverty measures such as suggested by Clark et al. (1981) are useful. We also investigate how empirically different are the relative magnitudes of chronic versus transient poverty, depending on the choice of a poverty measure. Based on a two-period household panel dataset collected in Pakistan, we show that the difference is substantial even when the poorest experienced only a small fluctuation in their consumption.

Abstract: This paper investigates the effects of human capital on productivity using micro panel data of rural households in the North-West Frontier Province, Pakistan, where a substantial job stratification is observed in terms of income and education. To clarify the mechanism underlying this stratification, the human capital effects are estimated for wages (individual level) and for self-employed activities (household level), and for farm and non-farm sectors. Estimation results show a clear contrast between farm and non-farm sectors --- wages and productivity in non-farm activities rise with education at an increasing rate, whereas those in agriculture respond only to the primary education.

Abstract: As one of the dimensions of vulnerability, this paper empirically investigates the inability of rural dwellers to cope with negative income shocks. A variable coefficient regression model is applied to a two-period household panel dataset collected in the North-West Frontier Province, Pakistan, an area with high incidence of income poverty and low human development. The empirical model allows for a different ability to smooth consumption, approximated by a linear function of households' attributes, and controls for the endogeneity of observed changes in income, using qualitative information on subjective risk assessment. Estimation results show that the ability to cope with negative income shocks is lower for households that are aged, landless and do not receive remittances regularly.

Abstract: This paper surveys the recent progress in modeling agricultural households and then gives an illustrative example of the achievements in child health in Sub-Saharan Africa and South Asia, paying special attention to the issue of intrahousehold resource allocation. From the empirical example using micro data sets from the Demographic and Health Surveys, a clear contrast is found in the effect of mothers' farming on child health between the two regions. We interpret that this could be due to a difference in gender roles in agricultural production and household food security. Because gender roles in agricultural production in Sub-Saharan Africa are "sex-segregated" where females are likely to grow subsistence food crops and are responsible for the production and disposal/marketing of these crops, those children with farming mothers are healthier than those with farming fathers. Because gender roles in agricultural production in South Asia are "sex-sequential" where females are assigned a specified set of operations without command over the disposal/marketing of crops and those households that send their women to agricultural labor markets are likely to be very poor, those children with farming mothers are less healthy than those with farming fathers. This interpretation is a tentative one without structural evidence. A microeconometric analysis, which directly combines households' resource allocation rules with households' achievement in production, consumption, and human capital investment is required.

Abstract: In this article, the role of crop specialization and diversification in agricultural transformation is investigated empirically. Changes in aggregate land productivity are associated structurally with inter-crop and inter-district reallocation of land use. Results from a region with the oldest history of agricultural commercialization in developing countries show that cropping patterns of subsistence agriculture changed substantially, with rising concentration of crop acreage in districts with higher and growing productivity. Rapid specialization in crop production was observed at the district level recently, after a phase with sporadic specialization. These changes reflected comparative advantage and contributed to the improvement in aggregate land productivity.

Abstract: This paper re-investigates the performance of agriculture in India and Pakistan, c.1900-1995 from historical and comparative perspectives. A new decomposition formula is applied to the data set used by the EPW 1999 paper, which corresponds to the current border in India and Pakistan. The decomposition results show that aggregate changes in crop mix were one of the most important sources of land productivity growth in India and Pakistan. Their contribution has become more important in recent decades in India whereas their contribution was the most important in Pakistan during the 1950s, i.e., the period just prior to the Green Revolution.

Abstract: This paper investigates the extent to which rural households in developing countries are able to smooth consumption, using a theoretical model of full risk sharing, in which participating households have different risk and time preferences. A resulting rule of resource allocation is characterized in an intuitive way, clarifying the effects of diverse preferences. Empirical models are applied to a household panel data collected from rural India. Estimation results strongly support the heterogeneity in risk preferences. In contrast, little evidence is found in favor of the intertemporal resource allocation across households according to differences in time preferences.

Abstract: The effects of education on farm and non-farm productivity are investigated in this paper using micro household data collected from rural areas in the North-West Frontier Province, Pakistan. The innovation of this paper lies in its empirical specification in which the effects of education are allowed to differ for each level of education attainment and the effects are estimated both for wages (individual level) and for self-employed activities (household level). Estimation results of returns-to-labor regression models show that private returns to male education are significantly positive in outside labor markets for non-agricultural work, with acceleration in reward as the education level goes up; the effects of human capital are nil on agricultural wages; the effects of primary education on crop productivity are significantly positive but with no additional gain from higher education. These results imply that more educated household members have comparative advantages in non-farming, which is consistent with our observations on labor allocation in the field.

Abstract: In this paper, we analyze the interaction of poverty, risk, and human capital at the household level, in order to obtain insights to an important development issue of eliminating rural poverty in developing countries. In the recent literature, the potential of human capital in overcoming two symptoms of poverty---low income and vulnerability to income risk---is drawing attention. As an attempt to extend this line of research, we implemented an original, detailed household survey in 1999/2000 in the North-West Frontier Province, Pakistan. This case study represents a rural region with an adverse land-man ratio and low human development. The 1999/2000 survey was designed as a re-survey of households that were investigated in 1996/97, so that we can examine the dynamics of poverty.

From descriptive analysis based on the 1999/2000 survey, it is suggested that, in the sample villages, human capital, especially education, plays an important role in overcoming the two symptoms of poverty through expanded opportunities of non-farm employment. Another important implication is that the lack of mechanisms to cope with income risk is likely to result in low accumulation of human capital. A policy implication of these findings is that provision of primary education and primary health care and public interventions to reduce the cost of income risk such as employment guarantee schemes may yield a large social benefit in the long run.

Abstract: In this paper, the role of crop specialization and diversification in the process of agricultural transformation is empirically investigated for the case of Punjab. The analytical innovation of this paper is that changes in aggregate land productivity are structurally associated with inter-crop, inter-district, and inter-household reallocation of land use. This structural association enables us to characterize the nature of market development and agricultural transformation in a specific region. The empirical part is based on newly-compiled production data of Punjab's agriculture for the period c.1900-1995, where a rapid growth of agricultural production has been observed.

Quantitative results show that, first, the diversity of a traditional and subsistence agriculture went down at the macro (national), semi-macro (district), and household levels, but at a lower pace at the macro level. This change was associated with crop shifts reflecting comparative advantages. Second, even in a region with the oldest history of commercialization of agriculture in developing countries, two phases were clearly distinguished in the specialization process---the first phase in which local transactions such as intra-village sales enable each farm to specialize in crops and the second phase in which inter-regional trading becomes more efficient, inducing a rapid specialization at that level.

Abstract: To understand welfare of poor rural households in developing countries, this paper investigates the role of economic diversification with an emphasis on the effects of human capital on non-agricultural activities. A theoretical household model of job diversification is presented to show the interaction of comparative advantage and risk diversification motivations. Implications of the theoretical model are tested empirically using the original data set collected from the rural North-West Frontier Province (NWFP), Pakistan, where poor households pursue their food security through income source diversification rather than through food production on their farms. No significant effects of human capital were found on crop production. Direct private returns to education were found significantly positive in outside labor markets for male workers. As a reduced-form determinant of household-level job diversification, we found that an increase in the average level of education significantly increases the diversification level. Although female education increased the probability of joining labor market outside, its effect on the wage level was found nil.

Abstract: This paper presents preliminary estimates of historical data of agricultural production in India and Pakistan areas, c.1900-1990. A salient feature of the estimates is that they correspond to the current international border. The British Empire of India, which was broken up in 1947 (so-called ``Partition" of the Indian Subcontinent), covered areas of India, Pakistan, and Bangladesh today. Although a rich accumulation of statistical documents is available from the colonial period, there has been no rigorous attempt to compile statistics corresponding to the current border for a period extended over the year 1947, because the Partition broke up the Empire of India not only at the provincial level, for which data are more readily available, but also at the district or lower levels of administration.

This paper is an attempt to remedy this gap, focusing on production of major agricultural commodities in India and Pakistan areas from 1901/02 to 1990/91. Since neither the state of Pakistan nor the concept of such a state did not exist during the early decades of the 20th century, the exercise is ``fictitious" to some extent. Nevertheless, because farming activities are carried out on the soil of the region irrespective of its political belongings, the preliminary estimates presented in this paper could shed new light on agricultural development in the two countries because of their longer time horizon.

Investigation of these estimates shows that the growth performance of agriculture in India and Pakistan was a stagnant one in the colonial period with the Pakistan side enjoying higher growth if any. This pattern was reversed at the independence in 1947, after which sustained growth in production was experienced in both countries.

Abstract:This paper quantitatively analyzes agricultural development in India and Pakistan, c.1900-1990. The analysis is based on preliminary estimates of historical data of agricultural production in India and Pakistan, which correspond to the current international border. It was found that the growth performance of agriculture in India and Pakistan was a stagnant one in the colonial period with the Pakistan side enjoying higher growth if any. This pattern was reversed at the independence in 1947, after which sustained growth in production was experienced in both countries. This study also investigates changes in crop composition and diversification. Results indicate that the agricultural sector both in India and in Pakistan witnessed an increase in crop concentration during the post-1947 period, suggesting that both economies are not yet in the stage of a mature market economy with diversified production at the national level.

Abstract: As one of the most important determinants of the quality of rural life in India, this paper quantitatively investigates the dynamics of consumption by village households. The investigation is based on a household panel data set collected during the period from 1975 to 1984 from three villages in Peninsular India. Estimation results show that the sample households as a whole witnessed gradual improvement in real consumption per capita although it fluctuated substantially across households. The fluctuation is decomposed into shocks common to all the villagers and idiosyncratic shocks (shocks specific to individual households). Decomposition results demonstrate that households with higher socio-economic positions are less vulnerable to idiosyncratic shocks and more willing to bear common risk. This pattern of resource allocation could be efficient in the static setting but could lead to more inequality and more isolation of the poor from economic growth when the rural economy enters into a period of rapid and dynamic transformation. Recent developments in the study villages partially support the relevance of the latter implication.

Abstract: This paper investigates the extent to which rural households in developing countries are able to smooth consumption, using a model of full risk sharing, in which participating households have different risk and time preferences. A resulting rule of resource allocation is characterized in an intuitive way, clarifying the effects of diverse preferences. Empirical models are applied to a household panel data collected from rural India. Estimation results strongly support the heterogeneity of risk preferences. In contrast, only a weak evidence is found in favor of the intertemporal resource allocation across households according to differences in time preferences.

Abstract: This paper tests the efficiency of insurance markets in the Pakistan Punjab by examining how crop choices are affected by the presence of price and yield risk. We estimate reduced-form and structural models of crop choices. Although we cannot reject the hypothesis that village members efficiently share risk among themselves, production choices are shown to depend on risk. Existing risk sharing and self-insurance mechanisms thus imperfectly protect Punjab farmers against village-level shocks. Results also indicate that households respond to consumption price risk, thereby suggesting that empirical and theoretical work on risk should avoid putting an exclusive emphasis on yield and output price risk.

Abstract: This paper analyzes the interaction of poverty, risk, and human capital in a descriptive way using micro household data from rural areas in the North-West Frontier Province, Pakistan. The key emphasis is on the potential of human capital in overcoming two symptoms of poverty---low income and vulnerability to income risk. We have found that, in the sample villages where land per capita is too small both quantitatively and qualitatively, human capital, especially education, plays an important role in overcoming the two symptoms through expanded opportunities of non-farm employment. Another important finding is that lack of mechanisms to cope with income risk is likely to result in low accumulation of human capital. A policy implication of these findings is that public interventions to reduce the cost of income risk such as employment guarantee schemes, provision of primary education and primary health care, may yield large social benefit in the long run.