Are poor households credit-constrained or myopic? Evidence from a South African panel

Erlend Berg

No 2010-31, CSAE Working Paper Series from Centre for the Study of African Economies, University of Oxford

Abstract: Credit constraints are an almost ubiquitous assumption in development economics. Yet direct evidence for credit constraints is limited, and many observations consistent with credit constraints are equally compatible with precautionary saving or myopic (non-forward-looking) consumption. Using household panel data and a source of widely anticipated income in South Africa, this paper first tests and rejects the standard consumption model with perfect capital markets. The standard model enriched with credit constraints is then contrasted with precautionary saving and myopic consumption as alternative explanations for the observed expenditure pattern. The standard model with credit constraints cannot be rejected in favour of precautionary saving or myopic consumption.

Date: 2010
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