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Consumption versus asset smoothing: testing the implications of poverty trap theory in Burkina Faso

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  • Carter, Michael R.
  • Lybbert, Travis J.

Abstract

Despite solid theoretical foundations for the notion that poor, borrowing-constrained households will intertemporally manage assets to smooth consumption, the consumption-smoothing hypothesis has not always withstood empirical scrutiny. This paper reassesses the intertemporal asset management problem with a poverty trap model and shows that we would expect to see asset smoothing, not consumption smoothing, in the neighborhood of critical asset levels at which optimal accumulation behavior bifurcates. We then employ threshold estimation techniques to empirically confirm the co-existence of consumption and asset smoothing regimes using a household panel data set from West Africa. Households above the estimated threshold almost completely insulate their consumption from weather shocks, whereas those below the threshold do not. These results not only indirectly provide evidence of the existence of poverty traps but also speak to the level and incidence of the costs of uninsured risk.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 99 (2012)
Issue (Month): 2 ()
Pages: 255-264

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Handle: RePEc:eee:deveco:v:99:y:2012:i:2:p:255-264

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Web page: http://www.elsevier.com/locate/devec

Related research

Keywords: Consumption smoothing; Risk; Poverty dynamics; Permanent income hypothesis; Africa; Threshold estimation;

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References

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Citations

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Cited by:
  1. Schicks, Jessica, 2014. "Over-Indebtedness in Microfinance – An Empirical Analysis of Related Factors on the Borrower Level," World Development, Elsevier, vol. 54(C), pages 301-324.
  2. Alderman, Harold, 2014. "Can transfer programs be made more nutrition sensitive?:," IFPRI discussion papers 1342, International Food Policy Research Institute (IFPRI).
  3. Simon Lange & Malte Reimers, 2014. "Livestock as an Imperfect Buffer Stock in Poorly Integrated Markets," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 162, Courant Research Centre PEG.
  4. repec:fpr:export:1342 is not listed on IDEAS
  5. Janzen, Sarah A. & Carter, Michael R., 2013. "The Impact of Microinsurance on Consumption Smoothing and Asset Protection: Evidence from a Drought in Kenya," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 151141, Agricultural and Applied Economics Association.
  6. Elabed, Ghada & Carter, Michael R., 2013. "Basis Risk and Compound-Risk Aversion: Evidence from a WTP Experiment in Mali," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150353, Agricultural and Applied Economics Association.

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