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The Persistence of Income Shocks: Evidence from Rural Indonesia

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  • David Newhouse

Abstract

This paper estimates the persistence of transient income shocks to farm households in rural Indonesia. Persistence is defined as the elasticity of a household's 1997 household per capita income with respect to its 1993 per capita income, controlling for time-invariant characteristics of the household. Local rainfall levels are used as an exogenous source of transitory variation in 1993 income. Four main conclusions emerge. First, roughly 30% of household income shocks remain after four years. Second, the persistence of negative and positive shocks is approximately equal; if anything, positive shocks last longer. Third, neither positive nor negative income shocks disproportionately affect poor households. Finally, measurement error in income and unobserved household heterogeneity are important sources of bias. These findings cast doubt on common arguments advocating public intervention to stabilize or redistribute income, and suggest that anti-poverty policy should address more permanent causes of household poverty. Copyright Blackwell Publishing Ltd 2005.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of Development Economics.

Volume (Year): 9 (2005)
Issue (Month): 3 (08)
Pages: 415-433

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Handle: RePEc:bla:rdevec:v:9:y:2005:i:3:p:415-433

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Cited by:
  1. Korkeala, Outi & Newhouse, David & Duarte, Mafalda, 2009. "Distributional impact analysis of past climate variability in rural Indonesia," Policy Research Working Paper Series 5070, The World Bank.
  2. Berloffa, Gabriella & Modena, Francesca, 2013. "Income shocks, coping strategies, and consumption smoothing: An application to Indonesian data," Journal of Asian Economics, Elsevier, vol. 24(C), pages 158-171.
  3. David I. Levine & Dean Yang, 2014. "The Impact of Rainfall on Rice Output in Indonesia," NBER Working Papers 20302, National Bureau of Economic Research, Inc.
  4. Walter Sosa-Escudero & Mariana Marchionni & Omar Arias, 2006. "Sources of Income Persistence: Evidence from Rural El Salvador," CEDLAS, Working Papers 0037, CEDLAS, Universidad Nacional de La Plata.
  5. Naschold, Felix & Walker, Thomas F. & Barrett, Christopher B. & Osei, Robert, 2011. "Idiosyncratic shocks, risk management and welfare dynamics in rural Ghana," 2011 Annual Meeting, July 24-26, 2011, Pittsburgh, Pennsylvania 109646, Agricultural and Applied Economics Association.
  6. Mangyo, Eiji, 2008. "Who benefits more from higher household consumption? The intra-household allocation of nutrients in China," Journal of Development Economics, Elsevier, vol. 86(2), pages 296-312, June.
  7. Stefan Dercon & Joseph S. Shapiro, 2007. "Moving On, Staying Behind, Getting Lost: Lessons on poverty mobility from longitudinal data," Economics Series Working Papers GPRG-WPS-075, University of Oxford, Department of Economics.

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