Consumption Smoothing, Commodity Markets, and Informal Transfers

How do low-income, rural households smooth consumption in the face of seasonal and stochastic variation in income when household access to formal financial services is limited? And how do consumption smoothing modes evolve in response to changes in transport infrastructure? We explore these questions by studying milk consumption smoothing for a panel of households from rural India. Household milk consumption is highly but incompletely smoothed relative to intertemporal variation in household milk production. Informal inter-household transfers provide only modest quasi-insurance. Mainly, households smooth consumption through milk market transactions. And as new roads reach villages, markets become even more important mechanisms for consumption smoothing, especially in high productivity seasons. These patterns underscore the central importance of product market participation for risk management in low-income rural communities.