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Income Shocks, Coping Strategies, and Consumption Smoothing. An Application to Indonesian Data

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Author Info
Gabriella Berloffa ()
Francesca Modena ()

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Abstract

Using the Indonesian Family Life Survey, this study investigates whether Indonesian farmers respond differently to income shocks (crop loss) depending on the level of their asset ownership, and whether their responses are aimed at preserving consumption levels or at accumulating assets. We consider a framework in which assets contribute directly to the income generation process. In this context the need to accumulate assets to ensure future income may lead poor farmers (those with a low level of productive assets) to behave quite differently in terms of both their responses to shocks and their consumption decisions. For them transitory shocks may have long term consequences when the income loss leads to changes in their asset investment decisions. Our results suggest that while non-poor farmers smooth consumption relative to income, poor households use labor supply to compensate the income loss and, on average, they save half of this extra income. These results confirm the importance of savings for poor households, and highlight a crucial role for policies that support savings or, more precisely, the accumulation of productive assets.

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Publisher Info
Paper provided by Department of Economics, University of Trento, Italia in its series Department of Economics Working Papers with number 0901.

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Date of creation: 2009
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Handle: RePEc:trn:utwpde:0901

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Related research
Keywords: income shocks; consumption smoothing; asset smoothing;

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  2. Morduch, Jonathan, 1995. "Income Smoothing and Consumption Smoothing," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 103-14, Summer. [Downloadable!] (restricted)
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  3. Jalan, Jyotsna & Ravallion, Martin, 1997. "Are the poor less well-insured? Evidence on vulnerability to income risk in rural China," Policy Research Working Paper Series 1863, The World Bank. [Downloadable!]
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  4. Stefan Dercon, 2002. "Income Risk, Coping Strategies, and Safety Nets," World Bank Research Observer, Oxford University Press, vol. 17(2), pages 141-166, September.
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  5. Kochar, Anjini, 1995. "Explaining Household Vulnerability to Idiosyncratic Income Shocks," American Economic Review, American Economic Association, vol. 85(2), pages 159-64, May. [Downloadable!] (restricted)
  6. Rosenzweig, Mark R, 1988. "Risk, Implicit Contracts and the Family in Rural Areas of Low-income Countries," Economic Journal, Royal Economic Society, vol. 98(393), pages 1148-70, December. [Downloadable!] (restricted)
  7. Udry, Christopher, 1995. "Risk and Saving in Northern Nigeria," American Economic Review, American Economic Association, vol. 85(5), pages 1287-1300, December. [Downloadable!] (restricted)
  8. Paul Gertler & Jonathan Gruber, 2002. "Insuring Consumption Against Illness," American Economic Review, American Economic Association, vol. 92(1), pages 51-70, March. [Downloadable!]
  9. 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. [Downloadable!] (restricted)
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  10. Lei Pan, 2007. "Risk Pooling through Transfers in Rural Ethiopia," Tinbergen Institute Discussion Papers 07-014/2, Tinbergen Institute, revised 28 Sep 2007. [Downloadable!]
  11. Paxson, Christina H, 1992. "Using Weather Variability to Estimate the Response of Savings to Transitory Income in Thailand," American Economic Review, American Economic Association, vol. 82(1), pages 15-33, March. [Downloadable!] (restricted)
  12. Chris Manning, 2000. "Labour Market Adjustment to Indonesia's Economic Crisis: Context, Trends and Implications," Bulletin of Indonesian Economic Studies, Taylor and Francis Journals, vol. 36(1), pages 105-136, April. [Downloadable!] (restricted)
  13. John Hoddinott, 2006. "Shocks and their consequences across and within households in Rural Zimbabwe," The Journal of Development Studies, Taylor and Francis Journals, vol. 42(2), pages 301-321, February. [Downloadable!] (restricted)
  14. John McPeak, 2004. "Contrasting income shocks with asset shocks: livestock sales in northern Kenya," Oxford Economic Papers, Oxford University Press, vol. 56(2), pages 263-284, April. [Downloadable!] (restricted)
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  16. Jacoby, Hanan G & Skoufias, Emmanuel, 1997. "Risk, Financial Markets, and Human Capital in a Developing Country," Review of Economic Studies, Blackwell Publishing, vol. 64(3), pages 311-35, July. [Downloadable!] (restricted)
  17. Maitra, Pushkar, 2001. "Is Consumption Smooth at the Cost of Volatile Leisure? An Investigation of Rural India," Applied Economics, Taylor and Francis Journals, vol. 33(6), pages 727-34, May. [Downloadable!] (restricted)
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