Precautionary Saving from Different Sources of Income: Evidence from Rural Pakistan

Abstract

Much of past literature has assumed that households in developing countries save at the same marginal rate from all sources of income. But in rural Pakistan households save at very different marginal rates from different sources of income. The marginal propensity to save from those sources of income that are more variable and uncertain - like external remittances - is much higher than from those sources of income that are more predictable - like rental income.

Few studies have tried to measure how households in a developing country save from each of the different income sources at their disposal. To help fill that gap, Adams uses five-year panel data to examine how households in rural Pakistan save from each of seven separate sources of income. Adams finds that households save from different sources of income at significantly different marginal rates. For example, the marginal propensity to save from external remittances (0.711) is much higher than that for rental income (0.085). As the precautionary model of saving suggests, the reasons for this relate to uncertainty: income that is more variable tends to be saved at a higher marginal rate. Faced with incomplete capital and credit markets, households in rural Pakistan save "for a rainy day" by putting away mainly those sources of income that are more variable and uncertain.

This paper - a product of the Poverty Reduction Group, Poverty Reduction and Economic Management Network - is part of a larger effort in the network to understand how households use savings for investment and development in developing countries.