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Precautionary Saving under Liquidity Constraints: Evidence from Rural Pakistan (Published in "Journal of Development Economics". )

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Author Info

  • Jeong-Joon Lee

    (Department of Economics, Towson University)

  • Yasuyuki Sawada

    (Faculty of Economics, University of Tokyo)

Abstract

This paper investigates precautionary saving under liquidity constraints in Pakistan using household panel data. In particular, while we estimates Kimball's (1990) prudence parameter, we deviate from Dynan's (1993) framework by explicitly considering liquidity constraints, as in Zeldes (1989). By doing so,we attempt to diffeerentiate the standard precautionary saving caused by uncertainty from the oneduetoliquidity constraints. Furthermore, endogenous liquidity constraints are considered toresolveis-sues of selection biases. In this study, we document substantial evidence of the presence of precautionary saving in Pakistan. More specifically, the estimated prudence is significantly higher for liquidity-constrainedhouse-holds as compared with unconstrained ones. The results support the emerging view that facilitating saving may often be more important than finding better ways of lending to the poor.

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File URL: http://www.carf.e.u-tokyo.ac.jp/pdf/workingpaper/fseries/52.pdf
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Bibliographic Info

Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-051.

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Length: 31 pages
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:cfi:fseres:cf051

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  1. Carroll, Christopher D & Kimball, Miles S, 1996. "On the Concavity of the Consumption Function," Econometrica, Econometric Society, vol. 64(4), pages 981-92, July.
  2. Orazio P. Attanasio & Hamish Low, 2004. "Estimating Euler Equations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(2), pages 405-435, April.
  3. Robert M. Townsend, . "Risk and Insurance in Village India," University of Chicago - Population Research Center 91-3a, Chicago - Population Research Center.
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  8. Smith, Richard J & Blundell, Richard W, 1986. "An Exogeneity Test for a Simultaneous Equation Tobit Model with an Application to Labor Supply," Econometrica, Econometric Society, vol. 54(3), pages 679-85, May.
  9. Cox, Donald & Jimenez, Emmanuel, 1990. "Achieving Social Objectives through Private Transfers: A Review," World Bank Research Observer, World Bank Group, vol. 5(2), pages 205-18, July.
  10. Martin Browning & Annamaria Lusardi, 1995. "Household Saving: Micro Theories and Micro Facts," Department of Economics Working Papers 1995-02, McMaster University.
  11. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April.
  12. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  13. Jonathan Morduch, 1995. "Income Smoothing and Consumption Smoothing," Harvard Institute of Economic Research Working Papers 1727, Harvard - Institute of Economic Research.
  14. Jappelli, Tullio, 1990. "Who Is Credit Constrained in the U.S. Economy?," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 219-34, February.
  15. Chen Yuyu & Zhou Li-An, 2003. "How Prudent are Community Representative Consumers?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-20, March.
  16. Alderman, Harold & Garcia, Marito, 1993. "Poverty, household food security, and nutrition in rural Pakistan:," Research reports 96, International Food Policy Research Institute (IFPRI).
  17. Philip Merrigan & Michel Normandin, 1994. "Precautionary Saving Motives: An Assessment from U.K. Time Series of Cross-Sections," Cahiers de recherche CREFE / CREFE Working Papers 29, CREFE, Université du Québec à Montréal.
  18. Eswaran, Mukesh & Kotwal, Ashok, 1989. "Credit as insurance in agrarian economies," Journal of Development Economics, Elsevier, vol. 31(1), pages 37-53, July.
  19. Timothy Besley, 1995. "Nonmarket Institutions for Credit and Risk Sharing in Low-Income Countries," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 115-127, Summer.
  20. Anjini Kochar, 1999. "Smoothing Consumption by Smoothing Income: Hours-of-Work Responses to Idiosyncratic Agricultural Shocks in Rural India," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 50-61, February.
  21. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2001. "The Empirical Importance of Precautionary Saving," CEPR Discussion Papers 2737, C.E.P.R. Discussion Papers.
  22. MR Rosenzweig, 2001. "Savings behaviour in low-income countries," Oxford Review of Economic Policy, Oxford University Press, vol. 17(1), pages 40-54, Spring.
  23. Robert M. Townsend, 1995. "Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 83-102, Summer.
  24. Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1104-13, December.
  25. Udry, Christopher, 1994. "Risk and Insurance in a Rural Credit Market: An Empirical Investigation in Northern Nigeria," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 495-526, July.
  26. Xu, Xiaonian, 1995. "Precautionary Savings under Liquidity Constraints: A Decomposition," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(3), pages 675-90, August.
  27. Alderman, Harold, 1996. "Saving and economic shocks in rural Pakistan," Journal of Development Economics, Elsevier, vol. 51(2), pages 343-365, December.
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  29. Karen E. Dynan, 1993. "How prudent are consumers?," Working Paper Series / Economic Activity Section 135, Board of Governors of the Federal Reserve System (U.S.).
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