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Risky Income or Lumpy Investments? Evidence on Two Theories of Underspecialization

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  • Ajay Shenoy

Abstract

Why do the poor have so many economic activities? According to one theory, the poor do not specialize because relying on one income source is risky. I test the theory by measuring the response of Thai rice farmers to conditional volatility in the international rice price. Households expecting a harvest take on one extra activity when the volatility rises by 21%. I confirm that the decrease in specialization costs households foregone revenue. I find no evidence to back a second theory in which households underspecialize because they cannot afford lumpy business investments.

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  • Ajay Shenoy, 2018. "Risky Income or Lumpy Investments? Evidence on Two Theories of Underspecialization," Economic Development and Cultural Change, University of Chicago Press, vol. 66(4), pages 629-671.
    • Handle: RePEc:ucp:ecdecc:doi:10.1086/697415
    DOI: 10.1086/697415
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    1. Shenoy, Ajay, 2017. "Market failures and misallocation," Journal of Development Economics, Elsevier, vol. 128(C), pages 65-80.
    2. Chuang, Yating, 2019. "Climate variability, rainfall shocks, and farmers’ income diversification in India," Economics Letters, Elsevier, vol. 174(C), pages 55-61.

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