Risk Taking, Income Distribution and Development - Aspects of Political Economy S.

This text examines the interaction between risk taking and problems of poverty and inequality. Beginning from Milton Friedman's famous 1953 article, Ravi Kanbur criticizes Friedman's major conclusion that greater risk is necessarily associated with greater inequality. Kanbur develops an alternative theory of risk taking and applies it to specific cases. He extends the Rothschild-Stiglitz analysis of the effects of increasing risk, but takes account of the realistic context where pay-off functions are "kinked" because of institutional and other rigidities. The theoretical analysis of risk taking and inequality forms the backcloth against which Kanbur examines policy-oriented issues of targeting and poverty alleviation. He shows that, in the absence of perfect information, policy makers have to rely on group level information and characteristics to target poverty alleviation programmes, although the precise rules may be unclear. This approach is applied to the specific case of food subsidies in developing and developed countries. This text should be of interest to students and academics in economic theory and development economics.