Uncertainty and Savings Decision

Abstract

This paper examines the effects of income shock on savings decision of a household. In particular, it analyzes how an idiosyncratic income shock affects the asset portfolio held by a household. It shows that income volatility contributes to poverty of rural households by leading them to reduce stocks of productive assets in order to accumulate liquid assets. Health related income shocks are signifi cantly more likely to lead to this than weather related income shocks, thus suggesting that policy interventions in health infrastructure might have a substantial impact on income. The study also reveals important differences in savings behavior between nuclear and joint families.