Consumption Smoothing and Risk Coping Mechanisms: Evidence from Rural India
Using the monthly ICRISAT panel data from 2009 to 2012, we test whether households smooth consumption in response to weather-driven income shocks in rural India. We find that the net balance of aggregate savings is almost perfectly responsive to income shocks. Consistent with a standard poverty trap model, while small and medium landholders hold on to their livestock and machinery and dissave less productive consumer durables, richer households draw from a variety of assets in face of shocks. Our results imply that households are able to self-insure even when institution fails to provide formal insurance mechanisms and markets operate inefficiently.