How does income uncertainty affect individual well-being? Combining individual-level panel data from rural Ethiopia with high-resolution meteorological data, we estimate that mean-preserving increases in rainfall variability are associated with reductions in objective consumption and subjective well-being. Mediation analysis suggests that the estimated reduction in consumption does not fully explain the total effect on individual well-being. Increased rainfall variability also has a large direct effect on individual well-being. These findings suggest that the gains from further consumption smoothing are likely greater than estimates based solely on observed consumption fluctuations.

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1 August 2015     Paper Number CEPDP1369

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This CEP discussion paper is published under the centre's Growth programme.