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Testing Theories of Consumption Behavior Using Information on Aggregate Shocks: Income Seasonality and Rainfall in Rural India
Author(s) -
Jacoby Hanan G.,
Skoufias Emmanuel
Publication year - 1998
Publication title -
american journal of agricultural economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.949
H-Index - 111
eISSN - 1467-8276
pISSN - 0002-9092
DOI - 10.2307/3180264
Subject(s) - consumption (sociology) , economics , debt , aggregate (composite) , econometrics , aggregate income , aggregate behavior , demographic economics , monetary economics , aggregate demand , macroeconomics , income distribution , inequality , monetary policy , mathematical analysis , social science , materials science , mathematics , sociology , composite material
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.