Journal Article

Testing Theories of Consumption Behavior Using Information on Aggregate Shocks: Income Seasonality and Rainfall in Rural India

Hanan G. Jacoby and Emmanuel Skoufias

in American Journal of Agricultural Economics

Published on behalf of Agricultural and Applied Economics Association

Volume 80, issue 1, pages 1-14
Published in print February 1998 | ISSN: 0002-9092
Published online February 1998 | e-ISSN: 1467-8276 | DOI: http://dx.doi.org/10.2307/3180264
Testing Theories of Consumption Behavior Using Information on Aggregate Shocks: Income Seasonality and Rainfall in Rural India

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  • Household Behaviour and Family Economics
  • Economic Development

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We develop an integrated framework for testing theories of consumption behavior by examining how agricultural households in rural India respond to anticipated and unanticipated seasonal income fluctuations. Using information on village-level rainfall surprises, we estimate idiosyncratic unanticipated income shocks by allowing weather risk to impact households differently depending on observable characteristics. In applying our methodology to unique panel data on consumption, debt, and intrahousehold gift exchanges, we address a number of shortcomings in previous tests of theories of consumption behavior. Yet, we find no evidence against the hypothesis that households smooth idiosyncratic fluctuations in their income. Our approach also uncovers several interesting features of rural credit and insurance markets.

Keywords: complete markets; consumption; India; liquidity constraints; permanent income; rational expectations; seasonality; D120; O120

Journal Article.  0 words. 

Subjects: Household Behaviour and Family Economics ; Economic Development

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