Risky Income or Lumpy Investments? Evidence on Two Theories of Underspecialization

Ajay Shenoy

Economic Development and Cultural Change, 2018, vol. 66, issue 4, 629 - 671

Abstract: Why do the poor have so many economic activities? According to one theory, the poor do not specialize because relying on one income source is risky. I test the theory by measuring the response of Thai rice farmers to conditional volatility in the international rice price. Households expecting a harvest take on one extra activity when the volatility rises by 21%. I confirm that the decrease in specialization costs households foregone revenue. I find no evidence to back a second theory in which households underspecialize because they cannot afford lumpy business investments.

Date: 2018
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Working Paper: Risky Income or Lumpy Investments? Evidence on Two Theories of Under-Specialization (2014)
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