Income Risk, Habit Formation, and Precautionary Savings: The Case of Rural Households

Abstract

Using a panel data, we estimated Euler equation under income risks and tested for pre-cautionary saving behavior among rural households while accounting for habit formation. Our results show an evidence for significant habit formation and precautionary saving motives. In the second part of the paper, we estimated actual savings equation under weather and labor income risks among same households. We found that rural households have tendency to save more under both weather risk and labor income risk but magnitude is higher under weather risk.