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

14 Pages Posted: 2 Apr 2020

See all articles by Hanan G. Jacoby

Hanan G. Jacoby

World Bank - Agriculture and Rural Development Department; World Bank - Development Research Group (DECRG)

Emmanuel Skoufias

World Bank

Date Written: February 1998

Abstract

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

Suggested Citation

Jacoby, Hanan G. and Skoufias, Emmanuel, Testing Theories of Consumption Behavior Using Information on Aggregate Shocks: Income Seasonality and Rainfall in Rural India (February 1998). American Journal of Agricultural Economics, Vol. 80, Issue 1, pp. 1-14, 1998, Available at SSRN: https://ssrn.com/abstract=3566422 or http://dx.doi.org/10.2307/3180264

Hanan G. Jacoby (Contact Author)

World Bank - Agriculture and Rural Development Department ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/hjacoby

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

Emmanuel Skoufias

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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