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How do income shocks affect armed conflict? Theory suggests two opposite effects. If labour is used to appropriate resources violently, higher wages may lower conflict by reducing labour supplied to appropriation. This is the opportunity cost effect. Alternatively, a rise in contestable income may increase violence by raising gains from appropriation. This is the rapacity effect. Our article exploits exogenous price shocks in international commodity markets and a rich dataset on civil war in Colombia to assess how different income shocks affect conflict. We examine changes in the price of agricultural goods (which are labour intensive) as well as natural resources (which are not). We focus on Colombia's two largest exports, coffee and oil. We find that a sharp fall in coffee prices during the 1990s lowered wages and increased violence differentially in municipalities cultivating more coffee. This is consistent with the coffee shock inducing an opportunity cost effect. In contrast, a rise in oil prices increased both municipal revenue and violence differentially in the oil region. This is consistent with the oil shock inducing a rapacity effect. We also show that this pattern holds in six other agricultural and natural resource sectors, providing evidence that price shocks affect conflict in different directions depending on the type of the commodity.

We study how aggregate economic conditions affect the timing of marriage, and particularly child marriage, in Sub-Saharan Africa and in India. In both regions, substantial monetary or in-kind transfers occur with marriage: bride price across Sub-Saharan Africa and dowry in India. In a simple equilibrium model of the marriage market in which parents choose when their children marry, income shocks affect the age of marriage because marriage payments are a source of consumption smoothing, particularly for a woman’s family. As predicted by our model, we show that droughts, which reduce annual crop yields by 10 to 15% and aggregate income by 4 to 5%, have opposite effects on the marriage behavior of a sample of 400,000 women in the two regions: in Sub-Saharan Africa they increase the annual hazard into child marriage by 3%, while in India droughts reduce such a hazard by 4%. Changes in the age of marriage due to droughts are associated with changes in fertility, especially in Sub-Saharan Africa, and with declines in observed marriage payments. Our results indicate that the age of marriage responds to short-term changes in aggregate economic conditions and that marriage payments determine the sign of this response. This suggests that, in order to design successful policies to combat child marriage and improve investments in daughters’ human capital, it is crucial to understand the economic role of marriage market institutions.

Economists have long sought to predict how macroeconomic shocks will affect individual welfare. Macroeconomic data and forecasts are easily available when crises strike. But policy action requires not only understanding the magnitude of a macro shock, but also identifying which households or individuals are being hurt by (or benefit from) the crisis. Moreover, in many cases, impacts on the ground might be already occurring as macro developments become known, while micro level evidence is still unavailable because of paucity of data. Because of these reasons, a comprehensive real-time understanding of how the aggregate changes will translate to impacts at the micro level remains elusive. This problem is particularly acute when dealing with developing countries where household data is sporadic or out of date. This volume outlines a more comprehensive approach to the problem, showcasing a micro simulation model, developed in response to demand from World Bank staff working in countries and country governments in the wake of the global financial crisis of 2008-09. During the growing catastrophe in a few industrialized countries, there was rising concern about how the crisis would affect the developing world and how to respond to it through public policies. World Bank staff s was scrambling to help countries design such policies; this in turn required information on which groups of the population, sectors and regions the crisis would likely affect and to what extent. The volume is organized as follows. Chapter 1 summarizes the methodology underlying the micro simulation model to predict distributional impacts of the crisis, along with several case studies that highlight how the model can be used in different country contexts. Chapters 2 to 4 are written by experts external to the Bank, two of whom participated as discussants at a workshop on the micro simulation work organized in May, 2010 at the World Bank headquarters. Chapter 2 comments on the broader implications and shortcomings of applying the technique described in Chapter 1 and the ability or willingness of governments to respond adequately to its results. Chapter 3 draws parallels between the United States and developing countries to discuss the lessons that can be learned for mitigating the impacts of future crises. Chapter 4 discusses how the micro simulation approach can be sharpened to make it a better tool for distributional analysis moving forward.

A growing empirical literature associates climate anomalies with increased risk of violent conflict. This association has been portrayed as a bellwether of future societal instability as the frequency and intensity of extreme weather events are predicted to increase. This paper investigates the theoretical foundation of this claim. A seminal microeconomic model of opportunity costs—a mechanism often thought to drive climate–conflict relationships—is extended by considering realistic changes in the distribution of climate-dependent agricultural income. Results advise caution in using empirical associations between short-run climate anomalies and conflicts to predict the effect of sustained shifts in climate regimes: Although war occurs in bad years, conflict may decrease if agents expect more frequent bad years. Theory suggests a nonmonotonic relation between climate variability and conflict that emerges as agents adapt and adjust their behavior to the new income distribution. We identify 3 measurable statistics of the income distribution that are each unambiguously associated with conflict likelihood. Jointly, these statistics offer a unique signature to distinguish opportunity costs from competing mechanisms that may relate climate anomalies to conflict.

The present study sought to determine if episodic future thinking (EFT) can decrease delay discounting (DD) and demand for fast food under simulations of economic scarcity in adults at risk for diabetes (i.e., overweight/obese and with hemoglobin A1c values in, or approaching, the prediabetic range). Across two sessions, participants completed assessments of DD and food demand at baseline and while prompted to: (1) engage in either EFT or control episodic recent thinking, and (2) while reading a brief narrative describing either economic scarcity or neutral income conditions. Results showed that EFT significantly reduced DD, whereas the economic scarcity narrative significantly increased DD; no significant interaction between EFT and scarcity was observed. No significant effect of either EFT or scarcity was observed on food demand. We conclude that EFT decreases DD even when challenged by simulated economic scarcity in adults at risk for diabetes. The absence of a significant interaction between EFT and scarcity suggests that these variables operate independently to influence DD in opposing directions. Effects of EFT and economic scarcity on food demand require further study. The present study was registered on clinicaltrials.gov (NCT03664726).

Objective In China, rural residents experience poorer health conditions and a higher disease burden compared to urban residents but have lower healthcare services utilization. Rather than an insurance focus on enhanced healthcare services utilization, we aim to examine that whether an income shock, in the form of China’s New Rural Pension Scheme (NRPS), will affect outpatient, inpatient and discretionary over-the-counter drug utilization by over 60-year-old rural NRPS residents. Methods Providing a monthly pension of around RMB88 (USD12.97), NRPS covered all rural residents over 60 years old. Fuzzy regression discontinuity design (FRDD) was employed to explore the NRPS causal effect on healthcare services utilization, measured by outpatient and inpatient visits and discretionary over-the-counter drug purchases. The nationwide China Health and Retirement Longitudinal Study (CHARLS) 2018 provided the data. Results Without significant changes in health status and medication needs, 60-plus-year-old NRPS recipients significantly increased the probability of discretionary OTC drug purchases by 33 percentage points. NRPS had no significant effect on the utilization of outpatient and inpatient utilization. The increase in the probability of discretionary OTC drug purchases from the NRPS income shock was concentrated in healthier and low-income rural residents. Robustness tests confirmed that FRDD was a robust estimation method and our results are robust. Conclusion NRPS was an exogenous income shock that significantly increased the probability of discretionary over-the-counter drug purchases among over 60-year-old rural residents, but not the utilization of inpatient or outpatient healthcare services. Income remains an important constraint for rural residents to improve their health. We recommend policymakers consider including commonly used over-the-counter drugs in basic health insurance reimbursements for rural residents; provide health advice for rural residents to make discretionary over-the-counter drug purchases; and to mount an information campaign on over-the-counter drug purchasing in order to increase the health awareness of rural residents.

We review findings from the emerging microeconomic literature on observed changes in food insecurity associated with the COVID-19 pandemic. To do so, we focus our review on studies in low- and middle-income countries that include household survey data measuring food insecurity collected both before and after the onset of the COVID-19 pandemic. We first focus on several studies—seven from countries in Sub-Saharan Africa and one from India—that estimate immediate changes in food insecurity associated with the COVID-19 pandemic. Next, we review subsequent analysis studying longer term changes in food insecurity associated with the COVID-19 pandemic. This review, therefore, complements existing macroeconomic projections of food insecurity based on expected changes in income and prices.

As countries grapple with the aftermath of climate-related disasters, the disruptions they inflict on domestic consumption ripple through the fabric of income and price level shocks. The income shock emanates from the adverse effects of such disasters on economic agents, leading to both wage and asset income losses. On the other hand, the destruction of productive capacity and the disruption of supply chains by climatic disasters generate a price level shock. To delve deeper into these channels, this paper builds a novel climate economy model using nonlinear model predictive control. Moreover, using time-series analysis for Bangladesh, the study uncovers compelling evidence of the existence of income and price channels through which climatic disasters impact consumption where the price effect has appeared stronger than the income effect. The findings suggest that policymakers should simultaneously prioritize income-generating and price-supporting initiatives after climate-related disasters to achieve a rapid and sustainable consumption recovery to match or surpass the predisaster level.

The distributional outcomes of monetary policy have garnered increasing attention in recent years. While there has been significant progress on both the theoretical and methodological design of studies on advanced economies, research on China has been limited, partly because of its opaque and unique monetary policy framework. This paper investigates the distributional effects of monetary policy shocks in China from 2003 to 2021, as the central bank converges towards a standard interest-rate based regime. A novel policy shock series for China is constructed using the high-frequency external instrument identification method that addresses endogeneity concerns between macroeconomic factors and policy decisions. A structural vector autoregression system identified by short-run restrictions is then used to analyze the impulse responses of income measures and asset market returns to these shocks. Findings suggest that contractionary monetary policy shocks have a negative impact on inequality in China, by increasing the relative share of income at the top and decreasing the share at the bottom of the distribution. Adverse effects are stronger for lower income groups who derive most of their income from labor and business, and experience large and persistent negative effects from an unanticipated rate hike. Meanwhile, the impacts on top earners are neutral or modestly positive, since their income portfolios are diversified by property holdings. As such, this analysis supports the income composition channel theory in explaining the heterogeneity in household responses to monetary policy shocks.

Smallholder agricultural commodity suppliers in developing countries are often vulnerable to global commodity price fluctuations. Using panel data on farmers from an area of Tanzania where most farmers grow coffee, this study finds that global coffee prices matter for household outcomes, through their effects on farmgate prices, coffee sales and revenues, and household expenditures. The article documents that households cope with coffee price busts by increasing enterprise ownership, an effect that is greater for households without access to other means of coping. Comparisons of mean outcomes of enterprises operated by coper households (which operated an enterprise only in periods of low coffee price) with those of stayer households (which operated an enterprise throughout the sample period) indicate that the former are less likely to be profitable or to hire workers.