Michael Carter, University of California, Davis

On the Definition and Estimation of Economic Resilience Using Counterfactuals

with Mo Alloush

This paper derives a quantitative metric of economic resilience based on the cumulative current and future losses a shock-exposed household experiences relative to a counterfactual measure of what their economic well-being would have been absent the shock. Drawing on the rich economics literature on the sensitivity of household consumption and income to shocks, we derive a resilience metric that can be estimated with panel data using standard impact evaluation and matching econometric methods. To illustrate these methods, we rely on a dynamic optimization model to generate data from a known data generation process. By manipulating the parameters of the model, we are able to explore the robustness of our resilience metric to presence or absence of multiple equilibrium poverty traps. We also show how this metric can be used to not only evaluate the impact of a policy (catastrophic insurance) on resilience but also to judge the public finance efficacy of that same policy by showing how the cumulative–loss based resilience measure can be used for cost-benefit analysis. We also show that reliance on income as a measure of economic wellbeing may be wiser in the absence of long-term data. Finally, we use data from a recent experiment in Mozambique and Tanzania to show that these methods can be informative even with relatively short duration data.