Consumption Smoothing in Village Economies: Intra-Temporal Versus Inter-Temporal Smoothing Mechanisms

This study examines the role of the various mechanisms that are employed to smooth consumption in village economies in less developed countries. Since intra-temporal remittances are only capable of smoothing the idiosyncratic component of risk, we include inter-temporal smoothing mechanisms into our analysis that are capable of smoothing the aggregate risk component. We develop a theoretical framework for our analysis that integrates two central strands of the village economy literature, risk sharing and buffer-stock saving. Using this framework we ask if transfers are targeted to liquidity constrained households, and we examine the relative use of the two types of mechanism by adding transaction costs in the use of intra-temporal remittances. We also analyze the relationship between remittances, household income and asset holdings using simulated data generated from the mode1. Our results suggest that within a risk sharing framework, remittances will be targeted to liquidity constrained households only under certain conditions; that there will be a positive relationship between asset accumulation and remittances; and that household income will be inversely related to remittances.