Friday, September 11, 2009

Cattle as self-insurance in modern economies

We have all used this example in class: in economies with no credit markets or serious banking, people may use cattle as a means of storage of value and to self-insure against future eventualities. But could such a thing happen in a modern economy with well-functioning financial markets?

Anne Borge Johannesen and Anders Skonhoft study Saami reindeer herding in northern Norway. The idea is to look at reactions to price fluctuations. For example, if meat prices increases and herders slaughter only few animals, it means that they keep them for other reasons than simply revenue: self-insurance or status. But one has to be careful. Price increases that are perceived to be permanent should lead in fewer slaughters in the short term, as herders beef up their animals. One needs to looks at temporary price changes.

Borge Johannesen and Skonhoft come to the conclusion that the price response is indeed weak for Saami herders. They also find that herd size is relevant for status, but that it does not appear to matter for slaughter decisions. Thus, there is a strong self-insurance component.

1 comment:

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