Risk and Saving in Northern Nigeria

This paper uses data collected by the author to examine the extent to which households in northern Nigeria use asset stocks to smooth their consumption over time in the face of production shocks. The primary question is simple: do households dissave when their farms suffer from negative production shocks? Evidence is presented in support of the thesis that households use their assets as buffer stocks against the receipt of idiosyncratic shocks. Households reduce their saving by economically significant amounts when they receive an adverse shock on their upland plots. In this agricultural economy, asset stocks are used directly in production. A standard model of intertemporal choice is modified in order to account for these direct linkages between saving and production and the consequent implications of consumption-smoothing behavior for households' portfolio choices. In accordance with the model, it is saving in the form of grain stocks (rather than livestock) which is reduced when households are affected by adverse shocks. Moreover, a significant portion of this response is increased net sales of grain contingent upon the realization of an adverse shock. Finally, it is shown that households forecast the receipt of near-future adverse shocks and that they increase current savings in anticipation.