Three essays on decision-making under uncertainty in developing countries.

Abstract

People face substantial risk and uncertainty throughout most developing countries. Economists have provided an array of economic theories to explain how decision agents make choices under uncertainty. Decision theory distinguishes between risky prospects and uncertain prospects. Under the classical theory of decision under risk, the utility of each outcome is weighted by its probability of occurrence. Expected utility theory was developed to explain attitudes toward risk, namely risk aversion and risk loving. Experimental studies of decision under risk have shown that people often violate the expected utility model. This study has been prompted by two questions about decision making under uncertainty: (1) Do agents in developing countries conceptualize the uncertainty in a way that is consistent with expected utility theory? (2) How do agents cope with uncertainty that lasts a long period of time? The first question is motivated by a notion that studies in the field of development economics often confound the two concepts of risk and uncertainty under the paradigm of expected utility theory. The second question is motivated by another notion, which is that there are a limited number of studies that investigate coping strategies of households during a prolonged period of uncertainty, such as morbidity shocks. To address these two questions, the first essay revisits the neoclassical theory of migration. The second and the third essays examine the impact of prime-age adult morbidity on intrahousehold resource allocation.