2002 Reports

Smoothing consumption under income seasonality: Buffer stocks vs. credit markets

Chaudhuri, Shubham; Paxson, Christina

Rural households in many developing economies have incomes that vary seasonally. We explore the implications of this income seasonality for household consumption. We use household-level data from three Indian villages to document seasonal patterns in income and consumption, and to test whether income seasonality produces seasonal consumption variation. Our basic finding is that while there does appear to be some seasonality in consumption patterns, it is much less pronounced than in the case of income, and more surprisingly, that the patterns are quite similar for households with very different seasonal income patterns. While this finding is consistent with well-functioning credit markets, we show, through simulations, that it is also consistent with a simple buffering model of consumption in which cautious households cannot borrow, but can save via the accumulation of assets. We provide evidence that suggests that households rely more on buffering behavior than on credit markets to smooth consumption under income seasonality.