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Income Shocks and Household Risk-Coping Strategies: Evidence from Rural Vietnam

Carol Newman and Fiona Wainwright ()
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Fiona Wainwright: Department of Economics, Trinity College Dublin

The Institute for International Integration Studies Discussion Paper Series from IIIS

Abstract: This paper considers the various strategies rural households employ to avoid consumption shortfalls caused by realizations of adverse income shocks. First, we develop an ex post theoretical model within an inter-temporal utility maximizing framework which we use to explain households’ decisions to insure against idiosyncratic risk and save to protect against uninsurable spatially covariant risk. In the theoretical model we show that the latter can take a variety of different asset forms depending on the absolute level of risk aversion of the household and the variability in asset returns. Second, using household level panel data from Vietnam we test the extent to which households’ smooth consumption over time and how this depends on the presence of insurance and saving instruments. Third, we consider savings and liquid asset holdings as a form of self-insurance or precautionary savings against spatially covariant shocks. Overall, our results suggest that households deplete their stock of total liquid assets in the event of exposure to both exogenous and idiosyncratic income shocks. The ability of households to cope is also dependent on their receipt of public and private transfers in the event of an exogenous natural shock with insurance claims serving to alleviate the depletion of livestock holdings in the event of insurable idiosyncratic income shocks. These results are particularly pronounced for low and middle wealth groups.

Keywords: Insurance; precautionary savings; risk-coping; income shocks (search for similar items in EconPapers)
JEL-codes: D14 D91 O12 O16 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2011-02
New Economics Papers: this item is included in nep-agr, nep-dev, nep-ias and nep-mfd
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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