Risk and Return in Village Economies

Area of Science:

• Economics
• Development Economics
• Financial Economics

Background:

• Formal financial markets for real and financial assets are often thin in developing economies.
• Households in these economies frequently run business enterprises and face both idiosyncratic and aggregate risks.
• Understanding risk and return on productive capital is vital for economic analysis.

Purpose of the Study:

• To develop a theory-based empirical framework for analyzing risk and return on productive capital assets.
• To apply this framework to understand asset allocation in economies with limited formal markets.
• To distinguish between aggregate and idiosyncratic risk and their implications for productivity.

Main Methods:

• Developed a theory-based empirical framework.
• Applied the framework to panel data from household business enterprises in Thai villages.
• Decomposed risk and estimated risk premia, distinguishing aggregate from idiosyncratic risk.

Main Results:

• Successfully applied the framework to Thai village households.
• Quantified the risk premia faced by these households.
• Demonstrated the importance of distinguishing between aggregate and idiosyncratic risk for productivity estimation.

Conclusions:

• The developed framework provides valuable insights into risk and return on productive assets in developing economies.
• Distinguishing risk types is critical for accurate productivity measurement.
• Findings have significant policy implications for household enterprises and economic development.