Adverse Income Shocks Research Articles

The gender gap in financial distress

ABSTRACT In this study, we investigate the gender gap in personal financial distress within the United States. Our study commences with a rigorous quantification of the gender disparity in financial distress, employing Logit regressions. Additionally, we perform a standard meditation analysis to dissect potential channels of income shocks and financial choices as well as their relative contributions to the gender disparity in financial distress. Leveraging data from the NLSY79 CYA panel, we empirically uncover that women are associated with a higher likelihood of experiencing financial distress than men. Furthermore, we provide evidence that women’s susceptibility to adverse income shocks and tendency towards making suboptimal financial choices are two potential mechanisms, with the latter accounting for a higher proportion in the identified gender gap than the former. Our findings are confirmed by various robustness checks including exploring other financial distress dimensions, accommodating additional personality traits, employing targeted subsample analyses, performing heterogeneity tests, using clustered standard errors at the regional level, and switching to an alternative sample. Our study sheds light on the effect of gender in personal financial fragility and the role of gender gap in economic outcomes.

Free compulsory education can mitigate COVID-19 disruptions’ adverse effects on child schooling

Developing countries are increasingly under siege from various adverse income shocks, including climate hazards and public health crises, which are known to increase households’ opportunity cost of child schooling. This paper uses an individual fixed-effect linear probability model to test whether free compulsory education mitigates the permanent effect of COVID-19’s containment measures on children’s school attendance. In so doing, we exploit the variation across levels of education in the implementation of free compulsory education laws in Nigeria. Estimation results show that fifteen months after schools reopened, COVID-19’s containment measures had no permanent effect on the school attendance of children whose schooling was free and compulsory. However, they decreased the school attendance of those whose schooling was neither free nor compulsory by 7.8 percentage points. Our findings suggest that pre-existing education policies, such as the scale of implementation of compulsory education laws, influence children’s vulnerability to the negative effects of adverse aggregate income shocks on children’s schooling outcomes.

Fertility Effects of Labor Market Conditions at Graduation

AbstractThis study examines how individuals' fertility outcomes were affected by the labor market conditions they experienced at graduation. Using data from the Chinese General Social Survey, it finds that poor labor market conditions at graduation delayed individuals' entry into parenthood. Higher unemployment rates at graduation reduced the probability of having at least one child in the survey year for both men and women. The negative fertility effects generally followed a U‐shape, reached the maximum around average childbearing ages, and faded out within 15 years after graduation. Low‐skilled workers mainly contribute to the negative fertility effects observed in the whole sample. Employment and marital outcomes are also analyzed as potential mechanisms. Estimation results indicate that individuals who experienced poor labor market conditions at graduation delayed marriage and the birth of the first child due to a lower probability of being employed, reduced working hours, and adverse income shocks. The negative long‐term fertility effects should be brought to policymakers' attention, especially when China's low fertility issue worsens. Policymakers are expected to create more favorable employment conditions for labor market entrants to encourage fertility and expand the future working‐age population.

Energy inflation and consumption inequality

This paper examines the effects of higher energy prices on consumption inequality for a large panel of 129 advanced and developing economies during the period 1970–2013. The results suggest that energy inflation increases the Gini measure of consumption inequality and reduces (increases) the share of consumption of lower (higher) income deciles. These effects are larger in developing economies, in countries with limited access to finance, in those with weaker monetary policy frameworks, during periods of economic slack and in cases where government transfers do not compensate the poorer deciles during times of adverse income shocks.

Child marriage as informal insurance: Empirical evidence and policy simulations

This paper investigates the relationship between child marriage and economic incentives in a setting where the bride price – a transfer from the groom to the bride’s parents at marriage – is customary. First, we develop a dynamic model in which households are exposed to income volatility and have no access to credit markets. If a daughter marries, her household obtains a bride price. In this framework, girls may have a higher probability of marrying early when their parents have a higher marginal utility of consumption because of adverse income shocks. Second, we measure the responsiveness of child marriage to income fluctuations by exploiting variation in rainfall shocks over a woman’s life cycle, using a survey dataset from rural Tanzania. We find that adverse shocks during teenage years increase the probability of early marriages. Third, we use these empirical results to estimate the parameters of our model and isolate the role of the bride price custom for consumption smoothing. In counterfactual exercises, we show that enforcing child marriage bans can have lasting effects on the timing of marriage even after a woman has exceeded the minimal age of marriage. The utility cost to parents of such enforcement is not large. Cash transfers, both conditional on avoiding child marriage and unconditional, can reduce early marriages, especially when they target low-income households.

The gender education gap in developing countries: Roles of income shocks and culture

When exposed to an adverse income shock, cash-constrained households may lean on culture to select the gender of offspring whose outcomes will be sacrificed to enhance survival. We test this by studying how culture mediates the impact of drought on the gender education gap in two separate settings: Malawi and Indonesia. In so doing, we proxy culture with kinship traditions (matrilocality and patrilocality) and exploit drought episodes’ spatial and temporal randomness as a source of exogenous variation in rural households’ exposure to adverse income shocks. After accounting for grid and year-fixed effects, we find that patrilocal households, but not matrilocal ones, sacrifice their daughters’ schooling in favor of sons’ when they experience droughts and schooling requires payment of fees. These results survive numerous robustness checks and are driven by disparities in women’s empowerment and the extent of son preference between matrilocal and patrilocal groups.

Domestic violence and workfare: An evaluation of India’s MGNREGS

• Existing research show that adverse income or rainfall shocks can lead to an increase in domestic violence. • This paper examines the affect of a public works program (MGNREGS) in rural India on domestic violence. • The paper finds that the MGNREGS acts as a safety net and mediates the effect of rainfall shocks on domestic violence. • The main channel is through risk-mitigation with some improvements in women’s mobility. Economic shocks are commonly linked with domestic violence. This paper looks at how India’s workfare program mediates the effect of income shocks on domestic violence. The Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) guarantees 100 days of employment to rural households and acts as a form of insurance. Using the phased implementation of MGNREGS across districts in India from 2006 to 2008, I employ a difference-in-differences strategy to show that the introduction of the MGNREGS mitigates the effect of adverse rainfall shocks on officially reported domestic violence crimes at the district level by 8 to 22 percent. Using complementary household data from the India Human Development Survey, I explore the mediating effect of the MGNREGS on rainfall shocks and possible increases in women’s empowerment. There are positive effects of participating in the scheme on women’s freedom of mobility but inconclusive evidence on women’s say in household decisions.

Consumer Choice in Residential Mortgage Market: An Islamic Mortgage Contract

This paper examines the Islamic mortgage contract of Diminishing Musharakah and its impact on consumer welfare, house purchase, and mortgage payments. We build both static and dynamic models to study a homeowner’s decision-making. We pay special attention to expectation formations and simulate the model to analyze both Islamic and Conventional mortgage holders’ responses to changes in income growth, house prices, and interest rates. Estimates of the model, using housing data set of U.S. economy (1990–2018), indicate that Diminishing Musharakah contract holders achieve 2.5 to 4% higher discounted utility under constant and declining learning expectations. The reducing balance feature of the Diminishing Musharakah contract provides relative protection to a consumer from adverse income shocks and high-interest rate environments. Simulation results suggest that under dynamic conditions, the Diminishing Mushrakah provides 3.4% lower mortgage cost per housing unit. It prevents consumers of average and low-risk appetite from relatively riskier housing decisions. We learn that consumer chooses a 2.5% smaller house size under Diminishing Musharakah. The model also examines consumers with vector autoregressive (VAR) based expectations. We find that homeowners with optimistic forecasts may achieve a higher utility in a conventional mortgage.

“Dragon boating” alone? Community ties and systemic income shocks

AbstractCan social capital effectively cushion households against adverse income shocks, especially in the absence of formal insurance mechanisms in developing countries? And what if such shocks are due international finance and thus universal and systemic in nature? We analyse whether participation in formal and informal community activities (our measure of social capital) helped households in Indonesia mitigating the impact of the 1998 financial crisis. We use the 1997 and 2000 rounds of the Indonesian Family Life Survey (IFLS) to capture the impact of the crisis on household welfare and assess the potency of social capital as a safety net. In contrast to previous studies, our empirical results do not lend support to this hypothesis. Using a fuzzy regression discontinuity design (RDD)—coupled by an IV strategy for extrapolation, we find community participation not to be statistically significant in explaining changes in household expenditure. The large magnitude and universal nature of the shock might explain why social capital did not help households. However, we find some suggestive evidence that households who participated in such activities are more likely to have received financial assistance from the local community without necessarily being the neediest ones.

COVID-19 Pandemic, Determinants of Food Insecurity, and Household Mitigation Measures: A Case Study of Punjab, Pakistan.

Policies centered to respond to the COVID-19 pandemic have created recessionary economic impacts. Adverse income shocks have caused malnutrition and food insecurity and have increased the need for food assistance. The present study examines the impact of the COVID-19 pandemic on food insecurity and investigates the determinants of food security and coping strategies in the Punjab province of Pakistan. Data were collected through the internet and received responses from 370 respondents. The household food insecurity access scale (HFIAS) model was applied to examine food insecurity, and a logit regression model was used to analyze its determining factors. The results illustrate that food insecurity substantially increased during the COVID-19 pandemic. Households’ demographics and socioeconomic factors have influence on food insecurity. Households with a large family size and people in quarantine found more food insecurity during the COVID-19 pandemic, while financial assistance played a role in a decline in food insecurity. Households handle the negative income shocks by eating less preferred food and getting support from government and charity organizations. It is suggested that stakeholders and responsible institutes provide financial assistance to support low-income families in order to enhance food security. Furthermore, policymakers should strengthen social safety nets and aid programs such as the Ehsas income program in the province of the country.

Farm Producers' Household Consumption and Individual Risk Behavior after Natural Disasters

AbstractUnderstanding how farm household consumption responds to adverse income shocks can provide insight into household well-being and appropriate agricultural policy. Using a split-sample survey of Indiana specialty producers, where we randomly assign respondents to treatments that vary the size of a hypothetical income shock, we estimate the relationship between income loss and household consumption. Given that postdisaster producers' risk preferences are important for business decisions, we elicit producers' risk preferences. We find that food and miscellaneous expenses are the most sensitive to income losses. We also find evidence for decreasing absolute risk aversion among producers after the income loss shock.

Do Marriage Markets Respond to a Natural Disaster? The Impact of Flooding of River Kosi in India

This paper studies the impact of flooding of river Kosi on the timing of marriage in Bihar, one of the poorest regions in the world. Using a difference-in-differences design, we show that Kosi floods reduced men’s age at marriage by almost a year and women’s age at marriage by over three months. Kosi floods also decreased secondary school completion rate of married men and women and labor force participation of married women. We interpret these results within a model of marriage markets, where in the absence of complete credit markets, local cultural practices, such as dowry, help smooth consumption in response to adverse income shocks. The impact of Kosi floods is more pronounced among Hindus (for whom dowry is the traditional marriage payment norm) and among the landless (who are more credit-constrained). Against the background of increased frequency of extreme floods in South Asia, this paper highlights a channel through which low mortality natural disasters can have long-lasting impacts.

The distributional implications of asymmetric income dynamics

Income dynamics differ between groups of households defined by whether the head has university education or not and have changed asymmetrically in Great Britain since 2008. Using a heterogeneous agent incomplete markets model, we examine the quantitative implications of these differences for wealth inequality and for the distribution of conditional welfare losses. Within-group wealth inequality is higher for the non-university group and has increased since 2008 for both groups, while between-group inequality has also increased. Welfare losses are significantly higher for the non-university educated since 2008, and are driven by both a greater fall in mean income and a larger rise in income risk. Non-university educated households, which had initial wealth below the median and net labour income in the lower quintiles, suffered bigger losses. Social insurance policies beyond those currently in place can mitigate such welfare losses via tax and benefit redistributive mechanisms. For the broad majority of households, social insurance is valued more when it insures against the big adverse income shocks.

Adverse Income Shocks: An Empirical Investigation of Rice Farmers in North-Central Nigeria

Adverse Income Shocks: An Empirical Investigation of Rice Farmers in North-Central Nigeria

Households' Responses to Adverse Income Shocks: An Empirical Investigation of Rice Farmers in North-Central Nigeria

Households' Responses to Adverse Income Shocks: An Empirical Investigation of Rice Farmers in North-Central Nigeria

Gender Gap in Savings Goal Choice: Evidence from Mixed Methods

There has been a good deal of research on gender psychological differences in the context of financial decision making, but no research on the impact of gender difference in the setting of savings goals. To address this question we use two unique datasets, one quantitative and one qualitative. Our quantitative results show that men set more challenging savings goals than women, even when we control for wealth, income, and portfolio risk taking. Our qualitative results corroborate these findings. Women are more likely to be content with targeting a comfortable life in retirement, setting an unambitious savings targets. They also tend to be more concerned than men by eventual possible future impediments to saving, such as adverse income shocks. This causesthem to focus more on the accessibility of their savings which implies that they are more likely to anticipate that they will have to reduce savings in the future. In contrast, men seem less concerned about possible future barriers to saving money. They are also more committed to saving and to wealth accumulation.

Assessing Macro-Financial Risks of Household Debt in China

High household indebtedness could constrain future consumption growth and increase financial stability risks. This paper uses household survey data to analyze both macroeconomic and finanical stability risks from the rapidly rising household debt in China. We find that rising household indebtedness could boost consumption in the short term, while reducing it in the medium-to-long term. By stress testing households’ debt repayment capacity, we find that low-income households are most vulnerable to adverse income shocks which could lead to signficant defaults. Containing these risks would call for a strengthening of systemic risk assessment and macroprudential policies of the household sector. Other policies include improving the credit registry system and establishing a well-functioning personal insolvency framework.

Weathering Volatility 2.0: A Monthly Stress Test to Guide Savings

Inconsistent or unpredictable swings in income and expenses make it difficult for families to plan spending, pay down debt, or determine how much to save. In this report, the JPMorgan Chase Institute uses administrative banking data to study the nature and trends of month-to-month fluctuations in income and spending and the levels of cash buffer families need to weather adverse income and spending shocks. We analyze monthly take-home income, spending, and account balances of over six million families’ Chase checking accounts between 2013 and 2018. We measure volatility with the Coefficient of Variation (CV) of monthly total take-home income. In addition to absolute volatility, we also measure income and spending spikes and dips separately. We examine the extent to which levels of volatility differ for sub-populations across the income spectrum, age, gender, and cash buffer. Finally, we empirically estimate the minimum levels of cash buffer families need to weather adverse shocks to their savings including income dips and spending spikes. We find that month-to-month income volatility has remained relatively constant over the past six years from 2013 to 2018. The level of income volatility remains high with those at the median level experiencing a 36 percent change in income month-to-month. Similarly, month-to-month spending volatility has also been flat during this period, with its level 15 percent lower than that of income but still high. In addition, families experience large income swings, including spikes and dips, in five months out of a year, where income spikes are twice as likely as dips and most common in March and December. Families with the most volatile incomes experience larger but not more frequent swings than those with less volatile incomes. There is wide variation in the levels of income volatility families experience and is greatest amongst the young and those in the highest income quintile. However, low-income families experience larger and more frequent income dips, an indication of downside risks. Finally, we find that families need roughly six weeks of take-home income in liquid assets to weather a typical and simultaneous income dip and expenditure spike. More than 60 percent of families lack a sufficient buffer to do so. In follow up work underway, we examine the impact of the 2019 January government shutdown on employees’ consumption and savings pattern as a case study of negative income shock. Altogether, our results offer important empirical guidance for the minimum levels of liquid buffer families need and implications for strategies to improve families’ financial health.

Assessing Macro-Financial Risks of Household Debt in China

High household indebtedness could constrain future consumption growth and increase financial stability risks. This paper uses household survey data to analyze both macroeconomic and finanical stability risks from the rapidly rising household debt in China. We find that rising household indebtedness could boost consumption in the short term, while reducing it in the medium-to-long term. By stress testing households' debt repayment capacity, we find that low-income households are most vulnerable to adverse income shocks which could lead to signficant defaults. Containing these risks would call for a strengthening of systemic risk assessment and macroprudential policies of the household sector. Other policies include improving the credit registry system and establishing a well-functioning personal insolvency framework.

Poverty Alleviation and profitability in Microfinance delivery: Is there a Conflict or Complementarity?

With a conspicuous absence of commercial banks in financing micro, small and medium enterprises, microfinance institutions (MFIs) emerged promising to finance growth and alleviate poverty by providing broad financial services to this vast market, thus expanding rural economic opportunities and reducing their vulnerabilities. MFIs have emerged to fill the crucial gap in banking this market niche in solving development problems of unemployment, poverty, income inequalities, enterprise growth, among others. Due to its socio-economic importance, enterprise finance has generated enormous enthusiasm among aid donors, governments and non-government organizations (NGOs) as an instrument for enhancing socio-economic development in a manner that is financially self-sustaining. The paper reports on a research which estimated the impact of microfinance institutions in The Gambia and selected MFIs in the developing world on poverty and other target variables, and attempted to relate such impact to the institutions’ design features. The findings showed that impact of lending on the recipient household’s income tend to increase, at a decreasing rate, as the recipient’s income and asset position improved, a relationship which can easily be explained in terms of the greater preference of the poor for consumption loans, their greater vulnerability to asset sales forced by adverse income shocks and their limited range of investment opportunities. There are significant outliers to this general pattern with very poor people not adequately reached as the programme focus on productive poor. This relationship defines an “impact frontier” which serves as a tradeoff: lenders can either focus their lending on the poorest and accept a relatively low total impact on household income, or alternatively focus on the productive poor and achieve higher impact. The position and slope of the estimated impact curve vary however with the policy and design of the institutions. Hence for many lending institutions the trade-off can often be moved by appropriate innovations in institutional design, in particular modifications to savings, loan collection, skills training and incentive arrangements for customers and employees. Building strategic partnerships with development agencies have over the years achieved complementarity in mist developing economies.