Showing papers on "Consumption smoothing published in 2014"

Inequality, the Great Recession, and Slow Recovery

Abstract: Rising inequality reduced income growth for the bottom 95 percent of the US personal income distribution beginning about 1980 To maintain stable debt to income, this group’s consumption-income ratio needed to decline, which did not happen through 2006, and its debt-income ratio rose dramatically, unlike the ratio for the top 5 percent In the Great Recession, the consumption-income ratio for the bottom 95 percent did finally decline, consistent with tighter borrowing constraints, while the top 5 percent ratio rose, consistent with consumption smoothing We argue that higher inequality and the associated demand drag helps explain the slow recovery

Coping with the economic consequences of ill health in Indonesia.

Abstract: We assess the economic risk of ill health for households in Indonesia and the role of informal coping strategies. Using household panel data from the Indonesian socio-economic household survey (Susenas) for 2003 and 2004, and applying fixed effects Poisson models, we find evidence of economic risk from illness through medical expenses. For the poor and the informal sector, ill health events impact negatively on income from wage labour, whereas for the non-poor and formal sector, it is income from self-employed business activities which is negatively affected. However, only for the rural population and the poor does this lead to a decrease in consumption, whereas the non-poor seem to be able to protect current household spending. Borrowing and drawing on family network and buffers, such as savings and assets, seem to be key informal coping strategies for the poor, which may have negative long-term effects. While these results suggest scope for public intervention, the economic risk from income loss for the rural poor is beyond public health care financing reforms. Rather, formal sector employment seems to be a key instrument for financial protection from illness, by also reducing income risk.

Saving for a (not so) Rainy Day: A Randomized Evaluation of Savings Groups in Mali

Abstract: High transaction and contracting costs are often thought to create credit and savings market failures in developing countries. The microfinance movement grew largely out of business process innovations and subsidies that reduced these costs. We examine an alternative approach, one that infuses no external capital and introduces no change to formal contracts: an improved “technology” for managing informal, collaborative village‐based savings groups. Such groups allow, in theory, for more efficient and lower‐cost loans and informal savings, and in practice have been scaled up by international non‐profit organizations to millions of members. Individuals save together and then lend the accumulated funds back out to themselves. In a randomized evaluation in Mali, we find improvements in food security, consumption smoothing, and buffer stock savings. Although we do find suggestive evidence of higher agricultural output, we do not find overall higher income or expenditure. We also do not find downstream impacts on health, education, social capital, and female decision‐making power. Could this have happened before, without any external intervention? Yes. That is what makes the result striking, that indeed there were no resources provided nor legal institutional changes, yet the NGO‐guided, improved informal processes led to important changes for households.

Determinants of farmers’ choice of coping and adaptation measures to the drought hazard in northwest Balochistan, Pakistan

Abstract: This study identifies the coping and adaptation behavior of the farm households and also examines the factors that influence farmers’ choice for drought-induced adaptation strategies. The study employs a multivariate probit model on 215 farm households’ survey data from northwest Balochistan, Pakistan. The findings reveal that the farmers have shown considerable fortitude in coping with the impacts of drought on their agro-based practices and employed several adaptation initiatives both at on-farm and off-farm levels. These include crop management, water management, adjustment in agricultural inputs, income diversification, economization of expenditure and consumption smoothing, migrating to other places to seek alternative sources of income, assets depletion, and borrowing. Empirically, it is depicted that landholding, annual income, livestock ownership, credit access, farmer-to-farmer extension, GOs/NGOs support increase the probability of farmers’ decision to cope and adapt better with drought hazard. This study implies for specific policy and practice-oriented solutions in order to cope with and adapt in drought situation.

Safety Net for India's Poor or Waste of Public Funds? Poverty and Welfare in the Wake of the World's Largest Job Guarantee Program

Abstract: This paper examines the eects of India's Mahatma Gandhi National Rural Em- ployment Guarantee Act, currently the world's largest public employment program, on household consumption and poverty rates in rural India. Combining regionally coded data from consumption surveys with information on the district-wise rollout of the program, we employ a regression discontinuity design to estimate program eects during the years 2007 and 2008. We …nd large, season-speci…c eects among a tradi- tionally deprived sub-group of the rural population, whose incomes are particularly dependent on agricultural wage labor. We …nd that for this group of households, which accounts for thirty percent of India's rural population, employment opportu- nities under the scheme have cut poverty during the agricultural lean season by as much as one half while we …nd no eect during the agricultural peak season. In a cost-bene…t analysis we …nd that consumption increases among this group of house- holds are of the same order of magnitude as the wage outlays of the program. We document that consumption among this group of households had previously exhibited severe systematic seasonal ‡uctuations and conclude that the employment program has had a lasting eect on consumption smoothing across agricultural seasons.

Regional unemployment, gender, and time allocation of the unemployed

Abstract: This paper analyzes the relationship between time allocation decisions of the unemployed, gender, and regional unemployment rates. Using two cross-sections from the 2002–2003 and 2009–2010 Spanish Time Use Surveys, we find that higher regional unemployment rates are associated with increases in the time devoted to study by men. Regional unemployment rates are also associated with more time devoted to household production, particularly for unemployed men and women living in a couple, and to less time devoted to leisure, particularly for unemployed men with a working partner and unemployed women not living in a couple. We interpret our findings as evidence favoring consumption smoothing. Higher regional unemployment rates imply a lower availability of jobs for the unemployed, it reduces individual expectations of finding a job, and thus households may try to increase their time spent on household production to reduce market expenditures and thus maintain their consumption constant. Increases in the time devoted to household production during business cycles need to be considered in the analysis of the wellbeing of the unemployed. Consumption smoothing may imply increased wellbeing, but more time devoted to household production is associated with lower experienced utility of individuals throughout the day.

A multi-agent model of a low income economy: simulating the distributional effects of natural disasters

Abstract: This paper develops an agent-based model of a stylized low income region in order to study the impact of natural disasters on population displacement, income, prices, and consumption with a focus on distributions and coping strategies of low income groups. Key features of the model include the integration of decentralized markets into a full economy in a spatially explicit way and the analysis of short-run adjustment processes. The model is calibrated to a low income region of rural agrarian Pakistan that faced severe floods in 2010. Dynamic adaptation by agents in response to falling income includes migrating and running down savings. Despite these consumption smoothing strategies, some low income groups are vulnerable to starvation. The paper showcases two hypothetical policy scenarios, a cash and a food transfer program, and tracks their effects on the welfare of low income groups in the economy.

Income Contingent Loans: Background

Abstract: Income contingent loans (ICL) are generally collected through the income taxation system and are repaid only when future incomes exceed a specified level. ICL were first introduced in Australia in 1989 to help college students finance their tuition costs; since then many countries have followed this policy approach. This background chapter analyses the conceptual and empirical basis of ICL, and explains that compared to ‘normal’ bank loans — which are paid on the basis of time — ICL provide the insurance benefits of consumption smoothing and default protection, and are associated with significant collection transactional efficiencies. We examine the prospect of the application of the basic principles of ICL into many other potential areas of social and economic policy, and highlight the significant ICL design difficulties related to both moral hazard and adverse selection.

Schooling as a Risky Investment: A Survey of Theory and Evidence

Abstract: Schooling as a Risky Investment: A Survey of Theory and Evidence focuses exclusively on the risk that is associated with investing in education. In this monograph, the authors' acknowledge that in educational choice, risk is everywhere, and that the variables affecting this choice are imperfectly known. Only recently has modern economic theory faced these issues. In a well organized framework, this monograph surveys the modest literature, identifies and explains the weakest aspects of knowledge in the field, reflects on policy issues, and presents an agenda for future research. Schooling as a Risky Investment: A Survey of Theory and Evidence is organized as follows. After an introduction, Section 2 presents data on ex post variation in outcomes, and evidence on student perceptions of variability and risk to show that risk is a relevant dimension for individual decision making. As a background to the models acknowledging uncertainty, Section 3 briefly considers models for investment in human capital under conditions of perfect information and a perfect capital market. Section 4 presents empirical evidence on the effect of risk on schooling choices. Section 5 surveys the literature for empirical evidence on the relationship between level of education and dispersion in earnings. Section 6 considers methods to cope with risk such as hedging human capital risk and self-insurance through consumption smoothing. Compensation in wages for the risk associated with schooling investment is then considered in Section 7, followed by a look at policy issues in Section 8. Finally, in Section 9, the monograph concludes by summarizing what is known and identifies interesting issues and directions for future research.

Is poverty the mother of crime? Empirical evidence of the impact of socioeconomic factors on crime in India

Abstract: Economic analysis of crime and criminal law addresses the question of individual welfare (utility) maximization through optimal allocation of resources and time in accordance to their relative returns. In this paper I first summarize the theoretical and empirical evidence on the nexus between crime and socio economic indicators. After which I test the hypothesis that people who are vulnerable to fall under the poverty line indulge in criminal activities as a consumption smoothing strategy. I also empirically inspect the role economic growth, unemployment, urbanization and quality of legal system play in inducing property related crimes. India is chosen as the case study because it has to carefully channel its funds and resources towards economic growth, poverty alleviation and crime deterrence concomitantly. The results indicate a positive and statistically significant impact of poverty, inequitable income growth and low quality of the legal system on incidence of total property-related crimes. Moreover, the elasticity figures suggest that poverty has the highest impact on robberies. Most convincing result comes from the figures of elasticity of education with crime where a 10% increase in per capita expenditure on education in India leads to a decline between 9.2-11.2% of overall property crime rates.

Banks’ Financial Distress, Lending Supply and Consumption Expenditure

Abstract: Les auteurs font appel a une strategie d’identification unique qui etablit un lien entre des donnees d’enquete sur les depenses de consommation des menages et des donnees concernant les institutions financieres, afin d’estimer l’incidence des difficultes financieres des banques sur le credit a la consommation et les depenses de consommation.

Wage shocks, household labor supply, and income instability

Abstract: Do married couples make joint labor supply decisions in response to each other’s wage shocks? The study on this question aids in understanding the link between the rising income instability and household insurance. Existing studies on household insurance either focus on consumption smoothing and take labor supply as a given, or only focus on wife’s labor responses to husband’s unemployment shocks. This article develops an intra-household insurance model that allows for insurance against permanent and transitory wage shocks from both partners. Estimation using the Survey of Income and Program Participation shows that wife increases labor supply in response to husband’s adverse wage shocks when both of them are working, and wife gets more nonlabor income when she is out of work. This intra-household insurance reduces earnings instability by about 2 to 9 %. These results suggest that joint labor supply decisions provide an extra smoothing effect on income instability.

The Role of Infrastructure in Mitigating Poverty Dynamics: The Case of an Irrigation Project in Sri Lanka

Abstract: While it is known that access to physical infrastructure enhances household welfare, there are very few micro-econometric studies that analyze its role in mitigating chronic and transient poverty. This paper aims to bridge this gap in the existing literature by evaluating the impact of a large-scale irrigation infrastructure project implemented in Sri Lanka. It identifies the treatment effect of irrigation access by exploiting a situation where the government used lotteries to distribute irrigated plots. Furthermore, in order to disentangle the channels through which the irrigation reduces poverty, we extend the seasonal consumption smoothing model of Paxson (1993; “Consumption and Income Seasonality in Thailand.” Journal of Political Economy 191(1):39–72) by introducing endogenous credit constraints. Using unique household level monthly panel data over a year, it is shown that with irrigation accessibility, not only the average income increases but also the patterns of income fluctuation changes and the probability of binding credit constraint declines through which transient poverty is mitigated. These empirical results suggest that irrigation infrastructure has a positive impact on reducing both chronic and transient poverty directly and indirectly by improving income and relaxing credit constraints.

Wealth decumulation, portfolio composition and financial literacy among European elderly

Abstract: This paper analyses the role played by financial literacy in savings decisions and wealth decumulation. The broad evidence shows that (elderly) households do not decumulate their assets as they age, contradicting the standard life-cycle theory, which predicts that households should decumulate their assets in order to keep their consumption smooth. In particular, older people seem to be very attached to illiquid assets, such as housing wealth, which is far more difficult to liquidate and use in case of unexpected shocks and for consumption smoothing. Using the SHARE (Survey of Health, Ageing, and Retirement in Europe) survey, we try to detect whether more financial literacy brings about more optimal behaviour from a life-cycle perspective. We look at the impact of financial literacy on three different dimensions of savings decisions: an unbalanced portfolio with excessive weight assigned to illiquid assets, the optimal consumption path, and wealth decumulation. According to our findings, higher financial literacy substantially reduces the portfolio imbalance of people aged 50+ by reducing the weight of housing wealth over total net worth. In addition, higher financial literacy is responsible for a more optimal consumption path and, in particular for men, for both net worth and housing wealth decumulation.

The Italian Household Consumption: A Comparison Among Recessions

Abstract: We compare households' behavior during recessions. We observe that households' consumption during the Sovereign debt crisis fell more than real disposable income. Based on the consumption equations of the Bank of Italy Quarterly Model, we find that, differently from past episodes, the reduction in wealth, partly due to capital losses, is relevant to explain consumption contraction; the length of the double recession and the intense consumption smoothing during the Global financial crisis may have played a non-negligible role as well. The microeconomic information contained in the Survey of Households Income and Wealth suggests that a large share of the fall in aggregate consumption stems from the choices of younger households, whose income and wealth decreased more significantly than those of their elder peers. Moreover, the perception of future income perspectives appears uncertain across all households types. Taking into account the subjective probability that the loss experienced in 2012 will extend into the future, we estimate that the perception of persistent denting of Italian households income did play a relevant role in driving the extraordinary fall of private consumption in the last few years.

Intergenerational redistribution and risk sharing with changing longevity

Abstract: Trend increases in longevity are a global phenomenon challenging the fiscal sustainability of current welfare arrangements. Policy proposals abound and often build on implicit assertions concerning intergenerational equity. This paper offers a simple but manageable OLG model with endogenous retirement and cohort-specific longevity to address intergenerational redistribution and risk sharing. While it is well known that a utilitarian planner strives for consumption smoothing, it is shown that healthy ageing calls for work smoothing in the sense that retirement ages increase with longevity. Hence, cohorts with higher longevity should contribute to their larger consumption needs via later retirement, although it is shown that the planner still front-loads some financing (pre-saving). Stochastic longevity raises the issue of intergenerational risk sharing, which implies that cohorts turning out to have a high longevity are compensated at the expense of cohorts turning out to have a relatively short longevity.

Impact of seasonality-adjusted flexible microcredit on repayment and food consumption : experimental evidence from rural Bangladesh

Abstract: The mismatch between credit repayments and income seasonality poses a challenge for microfinance institutions (MFIs) working in developing countries. For instance, in northern Bangladesh, income and consumption downfalls during the lean season after the transplanting of major paddy crops are a serious threat to a household's economy. Poor landless agricultural wage laborers suffer the most owing to this seasonality as they face difficulties in smoothing their consumption. However, in designing microcredit products, MFIs do not usually provide flexibility or seasonal adjustment during the lean season. This is mainly because MFIs are afraid that such flexibility might break the repayment discipline of borrowers, resulting in higher default rates. We thus conducted a randomized controlled trial in 2011-12 in northern Bangladesh to empirically test whether seasonality-adjusted flexible microcredit leads to an increase in repayment problems for MFIs as well as whether it can increase and stabilize consumption of borrower households. Our results suggest no statistically discernible difference among the treatment arms in case of default, overdue amount, or repayment frequency. On the other hand, we find no positive impact of repayment flexibility on immediate food consumption during the period of seasonality, except for in-kind full moratorium treatment group. After a year of initial intervention, however, we see positive changes in food intake during the lean season. Thus, our preliminary results are in favor of seasonality-adjusted flexible microcredit.

Industrial specialization, financial integration and international consumption risk sharing

Abstract: Standard models of international asset trade lack mechanisms linking an economy’s financial openness and industrial specialization. This paper presents a simple model of global portfolio diversification in which a link between financial liberalization and production specialization emerges very naturally. Within that model, an economy that liberalizes its financial markets is able to share its consumption risks, which in turn would allow the country to take extra risks in production by specializing in the good it produces more efficiently, resulting in higher output volatility and less correlated business cycles. The model provides insights about the effects of cross-country and cross-sector productivity shock correlations on portfolio choice, industrial specialization and consumption smoothing. Output volatility will increase as countries get more financially open, whereas consumption smoothing will depend on both the actual level of financial openness and on the productivity shock correlations between sectors and between countries. Higher integration induces greater production specialization, whereas the effect of productivity correlations on production diversification is ambiguous and depends on the degree of financial frictions.

The Composition Effect of Consumption around Retirement: Evidence from Singapore

Abstract: It is well established that consumption is “hump” shaped over an individual’s lifecycle, peaking in middle age and then declining in the years that follow. Prior research has documented that consumption declines at retirement, which is inconsistent with the standard lifecycle model with consumption smoothing. Using a unique dataset with detailed administrative records of credit and debit card transactions, we show the hump shaped lifecycle consumption pattern as documented in the literature. Additionally, we show compositional changes in consumption expenditures across individuals in the years surrounding retirement confirming the results of Aguiar and Hurst (2005, 2013).

Effects of livelihood strategies on mangrove-forest resource : Do the consumption behaviour of households jeopardise the forest resource base?

Abstract: Purpose – The cumulative effects of climate change exacerbate interruption of social-ecological system. The purpose of this paper is to investigate whether the consumption smoothing along with other socioeconomic parameters of households affects the common pool resource base of a forest in an economic depression resulted from climate change triggered disasters. Design/methodology/approach – This paper is a field level study of Koyra sub-district in the Southwestern coastal region of Bangladesh. Several parameters namely climatic trends and events, damage pattern suffered by households, change in land ownership and occupation pattern and consumption dependency pattern were considered. Methods used for data collection were household questionnaire survey and focus group discussions in the study area. Findings – Both the intensity and frequency of climate change led catastrophes are found higher in the study area resulting damage of assets and capital goods of households. The average annual disaster damage bo...

Simulating natural disasters — A complex systems framework

Abstract: This paper summarizes the SHELscape model ([1]), a complex systems framework developed for understanding economic transitions after natural disasters. The model is spatially defined with two agent categories (workers and owners) across two region types (rural and urban) producing two types of goods (food and a tradeable good). Seven behavioral modules define the setup of a low-income agrarian economy. A stylized calibrated system is subjected to a food production shock and changes of population, incomes, and consumption distributions are tracked. Coping mechanisms result in temporary consumption smoothing through savings; however, a large majority of the population still falls below the consumption poverty line. Two policy options, a cash transfer and a food transfer scheme, and their effects on the region are tested. Results show that income transfers result in higher income inequality while the food transfer scheme increases the rate of savings growth. The aim of this paper is to highlight how an agent-based framework can be used to study complex systems especially when data is weak and an immediate policy response is required.

Real Term Structure Forecasts of Consumption Growth

Abstract: This paper suggests an affine term structure model of real interest rates to predict changes in real consumption growth. The model is estimated, jointly, by real interest rates and consumption data, and it is found to be consistent with the consumption smoothing hypothesis. The paper shows that the real term structure is spanned by two common factors, which can be given the interpretation of the level and slope factors, respectively. The risks associated with these factors are priced in the market. Both of these factors can explain the information content of the short-term real interest rate and its term spread with longer term interest rate in forecasting future real consumption growth, over different periods ahead.

Drivers of cattle commercialization in rural South Africa: A combined test of transaction cost and store-of-wealth hypotheses

Abstract: Empirical studies investigate micro-level determinants of livestock market participation among smallholders from either the transaction cost or the consumption smoothing perspective Based on the sustainable livelihoods framework (SLF), this study proposes a unifying lens through which key insights from the two perspectives can be conceptually synthesized Leveraging on the proposed unifying lens, a cross-sectional dataset from a survey of 230 cattle farmers in the Okhahlamba Local Municipality is employed in the analysis of a Double Hurdle model In line with the transaction cost hypothesis, the preliminary results suggest that education and cattle productivity influence positively the decision to participate in cattle markets, and given positive decision, the supply volume increases with proximity to rural towns Vindicating the store-of-wealth hypothesis, the results also show a negative effect of access to water sources on the market participation decision, coupled with a positive and negative effects of cattle productivity and expected price, respectively, on supply volumes The article concludes with some implications for rural development policy in South Africa

The Elasticity of Substitution Between Time and Market Goods: Evidence from the Great Recession

Abstract: This paper examines household consumption smoothing via variation in time spent shopping over the business cycle. Using scanner data on grocery purchases, we document how households lower the prices that they pay during downturns by increasing their coupon usage, sale purchasing, buying larger sizes and generic products. We show that this behavior is consistent with a significant decline in households' cost of time in recessions, which is comparable to the decline in cost of time over an individual's life-cycle. Using our estimated cost of time and data from time-use diaries, we estimate a high elasticity of substitution between time and goods in home production. This implies that households are able to smooth a sizable fraction of consumption, relative to market expenditures, by varying their intra-temporal allocation of time during recessions.

How Did CESEE Households Weather the Crisis? Evidence from the OeNB Euro Survey

Abstract: During the crisis period from 2008 to 2013 household disposable income deteriorated significantly in Central, Eastern and Southeastern Europe (CESEE), forcing households to adjust their consumption plans. Against this background, the present paper sheds some light on households’ consumption smoothing behavior based on microdata supplied by the OeNB Euro Survey for ten countries in CESEE. We find that households reacted to stagnating and in some countries falling income mostly by cutting back on everyday consumption and reducing or postponing large expenditures, while other households coped by reducing the amounts they were setting aside as savings or by drawing on existing savings, overdrawing their current accounts and increasing work hours. Moreover, we find that macroeconomic forecasts by the European Commission, the wiiw and the OeNB are broadly in line with economic sentiment among CESEE households. Finally, Euro Survey results revealed that not all households were able to borrow as much as they would have liked to and that the share of households planning to take out a loan fell between 2008 and 2013.

Maturity and Repayment Structure of Sovereign Debt

Abstract: This paper studies the maturity, timing and relative size of repayments for sovereign debt. Using Bloomberg bond data for emerging economies, we document that sovereigns issue debt with shorter maturity but more back-loaded repayments during downturns. To account for this pattern, we study a sovereign-default model of a small open economy which issues a state-uncontingent bond, with a flexible choice of maturity and repayment schedule. In our model, as in the data, during recessions the country prefers its payments to be more back- loaded—delaying relatively larger payments—in order to smooth consumption. However, such back-loaded debt is expensive since payments scheduled later involve higher default risk. To reduce borrowing costs, the country optimally shortens its maturity. We calibrate the model to yearly Brazilian data. The model can rationalize the observed patterns of maturity and repayment structure, as an optimal trade-off between consumption smoothing and endogenous borrowing cost due to lack of enforcement.