Consumption, habit formation, and savings: Evidence from a rural household panel survey

Aditya R. Khanal, Ashok K. Mishra, S. Nedumaran

Research output: Contribution to journalArticle

Abstract

Protecting consumption from the effects of uninsured risk is vital for rural farming households, who tend to be poor and live close to subsistence level. Income uncertainty and habit formation play important roles in the consumption and savings. Variability in weather conditions has a strong linkage with variability in agricultural income in developing countries. This study analyzes consumption and saving decisions of rural farm households in India. Using household panel data for 4 years, we estimated consumption equation accounting for habit formation under income uncertainty. Our findings suggest an evidence for habit formation among rural households. Additionally, we found that both annual and seasonal weather risks significantly influence savings among rural households. Findings from this study also suggest a robust and vibrant farm economy and that the nonfarm economy could contribute to the economic well-being of rural farming households.

Original languageEnglish (US)
Pages (from-to)256-274
Number of pages19
JournalReview of Development Economics
Volume23
Issue number1
DOIs
StatePublished - Feb 1 2019

ASJC Scopus subject areas

  • Geography, Planning and Development
  • Development

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