Publication Details

A risk sensitive measure of indivdual vulnerability to poverty

Gabriella Flores
Owen O'Donnell
2010

Abstract

The measurement of individual vulnerability to poverty defined as expected poverty depends on (1) a mathematical expectation, (2) a poverty indicator and (3) the probability distribution of future consumption. This paper shows ¯rst that the scale in which poverty is defined has important implications for the specification of the consumption generating process. Second, assuming log-normal distribution of consumption and using the Chakravarty and Muliere (2004) class of utility poverty gap measures, a set of vulnerability measures is proposed that are risk-sensitive, depend on both the mean and variance of the welfare indicator and imply plausible attitudes to risk. Third, these indices are shown to quantify the individual expected severity of future poverty and to distinguish between vulnerability arising from low expected welfare and high volatility of welfare. Such distinction does not depend on the choice of a vulnerability threshold. Fourth, we show the importance of defining vulnerability as a conditional expectation for the measurement and interpretation of vulnerability to poverty as an ex-ante risk of poverty even under the assumption of covariance stationarity.

Publication Type(s)

Conference Paper

Ten Years of War Against Poverty Conference Papers

Conference: Ten Years of War Against Poverty

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