Vulnerability in a Stochastic Dynamic Model

Most measures of vulnerability are a-theoretic and essentially static. In this paper we use a stochastic Ramsey model to find a household's optimal welfare and we measure vulnerability as the shortfall from the welfare attained if the household consumed permanently at the poverty line. The results indicate that vulnerability is very sensitive to the time horizon considered. We find that the accuracy of existing regression-based vulnerability measures can be greatly improved by including asset measures in the regression.