Household Income Risk Research Articles

Interest Rate Cuts vs. Stimulus Payments: An Equivalence Result

In a textbook New Keynesian model extended to allow for uninsurable household income risk, any path of inflation and output implementable via interest rate policy is similarly implementable through uniform lump-sum transfers (stimulus checks). A dual-mandate policymaker can thus use checks to perfectly substitute for conventional monetary policy when rates are constrained by a lower bound. In a quantitative heterogeneous-agent (HANK) model, the stimulus check policy that implements a given monetary allocation is well-characterized by a small number of measurable sufficient statistics. In the household cross-section, the transfer policy is associated with lower consumption inequality than the equivalent rate cut.

Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk

Households face large income uncertainty that varies substantially over the business cycle. We examine the macroeconomic consequences of these variations in a model with incomplete markets, liquid and illiquid assets, and a nominal rigidity. Heightened uncertainty depresses aggregate demand as households respond by hoarding liquid “paper” assets for precautionary motives, thereby reducing both illiquid physical investment and consumption demand. We document the empirical response of portfolio liquidity and aggregate activity to surprise changes in idiosyncratic income uncertainty and find both to be quantitatively in line with our model. The welfare consequences of uncertainty shocks and of the policy response thereto depend crucially on a household's asset position

Cyclical Income Risk in Great Britain

This paper establishes new evidence on the cyclical behaviour of household income risk in Great Britain and assesses the role of social insurance policy in mitigating against this risk. We address these issues using the British Household Panel Survey (1991-2008) by decomposing stochastic idiosyncratic income into its transitory, persistent and fixed components. We then estimate how income risk, measured by the variance and the skewness of the probability distribution of shocks to the persistent component, varies between expansions and contractions of the aggregate economy. We first find that the volatility and left-skewness of these shocks is a-cyclical and counter-cyclical respectively. The latter implies a higher probability of receiving large negative income shocks in contractions. We also find that while social insurance (tax-benefits) policy reduces the levels of both measures of risk as well as the counter-cyclicality of the asymmetry measure, the mitigation effects work mainly via benefits.

The Economics of Smallholder Rubber Farming in a Mountainous Region of Southwest China: Elevation, Ethnicity, and Risk

While the expansion of smallholder rubber farming in southwest China has contributed to the local rural economy, it has also had negative environmental consequences. The economics and potential risks of smallholder rubber farming remain unclear due to the lack of quantitative evidence. Based on data collected in a comprehensive survey of 612 smallholder rubber farmers in Xishuangbanna, this paper quantifies economic aspects of rubber farming including land use, inputs and outputs, household income composition, and risks. In particular, we compare differences in these parameters associated with ethnicity and elevation. Our results suggest that rubber has taken over the rural economy in the rubber-planting region of Xishuangbanna, where almost 80% of agricultural land is devoted to rubber. On average, rubber farming provides over 40% of smallholder incomes. While smallholder rubber farming is generally highly profitable, it is also highly vulnerable to price fluctuations. Rubber expansion has also reduced diversification and thereby increased household income risk. Most importantly, our analysis shows that the economic performance of smallholder rubber farming differs for different ethnic groups and at different elevations. The results of this study provide important quantitative information on smallholder rubber farming that can inform policymaking and guide future research.

Full Information Estimation of Household Income Risk and Consumption Insurance

Blundell, Pistaferri, and Preston (American Economic Review, 2008, 98(5), 1887-1921) report an estimate of household consumption insurance with respect to permanent income shocks of 36%. In replicating findings for their model and data, we find that this estimate is distorted by a code error and is not robust to weighting scheme for GMM or consideration of quasi maximum likelihood estimation (QMLE), which produces a significantly higher estimate of consumption insurance at 55%. For sub-groups by age and education, the differences between estimates across methods are even more pronounced and QMLE provides new insights into heterogeneity across households compared to the original study. Monte Carlo experiments using non-Normal shocks suggest that consumption insurance estimates for the model are more accurate for QMLE than GMM, including when correcting for bias and especially given a smaller sample such as is only available when looking at sub-groups.

Gender and intra-household migration decision in India: An Empirical Analysis

The objective of this paper is to understand the gender differences in migration patterns at the intra-household level and the socio-economic factors that cause such differences. Furthermore, the paper aims to explore the gender-specific dynamics of migration. The theoretical framework is drawn from the New Economics of Labour Migration model modified to address the gender dimension. In other words, the methodology highlights the linkage between NELM model and empirical evidence in order to understand the influence of gender in the migration decision making process in the household. Data from the National Sample Survey 2007-08 is used, along with the logistic regression technique in order to understand gender differences in migration in a household context. The empirical findings of the study reveal that in poor economic settings the risk of migration of women is higher than that of men within the household, indicating vulnerability of females both as bread winners and care takers. For meeting familial needs and to cope with household income risk most of the females choose migration as a livelihood strategy and therefore they migrate at a higher rate than males. This paper highlights the importance of gender in the household migration decision-making model.

Domestic or global imbalances? Rising income risk and the fall in the US current account

When default leads to exclusion from financial markets, the implied loss of consumption smoothing opportunities is more costly when income volatility is high. A rise in income risk thus makes default less attractive, allowing creditors to relax borrowing limits. I show how, in an open economy, this endogenous financial deepening may reduce aggregate foreign assets in response to a rise in individual income risk, against the precautionary savings intuition. Conditions for this depend on whether default constrains complete or uncontingent contracts. The post-1980 rise in US household income risk strongly reduces foreign assets when domestic markets are complete or world interest rates low.

Effects of agricultural policy reforms and farm characteristics on income risk in Swiss agriculture

PurposeThe purpose of this study is to examine the effects of agricultural policy reform – specifically the change from market to direct payment support – on income variability of Swiss farming households. In addition, the observed heterogeneity in income risks across farms and time is explained in terms of farm and regional characteristics.Design/methodology/approachUnbalanced farm‐level panel data of the Swiss farm accountancy network (FADN) are used to construct coefficients of variation of five‐year overlapping time intervals for total household income and gross farm revenues over the period 1992 to 2009. Linear fixed effect models are applied to measure the effect of specialization, off‐farm income, direct payments, farm size, and liquidity on the variability of gross farm revenues and household income in the valley, hill, and mountain regions.FindingsThe switch from market‐based support to direct payments has decreased the variability of farm revenues and household income. The strong reliance on direct payments serves as insurance for most farmers and reduces both household income and revenue risk. Off‐farm income can be used by farmers to reduce household income risk but it increases revenue risk in the valley regions. In all of the regions considered, farm size has a positive effect on household income risk and a negative effect on revenue risk. A high degree of specialization increases both gross revenue and household income risk. Potential revenue insurance contracts should specify farmers' off‐farm employment, the degree of specialization, farm size, and regional specific risk profiles.Originality/valueThis paper assesses the complementary effects of specific farm characteristics and risk management strategies with regard to both farm revenue and household income risk. Influences of agricultural policy changes on income risks are also empirically assessed at different spatial scales.

Les Français sont-ils prudents ? Patrimoine et risque sur le marché du travail

"Bildung von Rücklagen für unvorhergesehene Ereignisse“, so begann Keynes (1936) seine Liste der "acht wichtigsten subjektiven Motive oder Gründe, weshalb die Menschen ihre Einkünfte nicht ausgeben möchten“. Für dieses Vorsichtssparen - insbesondere aufgrund der Unwägbarkeiten im Hinblick auf die künftigen Einkünfte - nahmen dreißig Jahre später Leland (1968), Sandmo (1970) oder Drèze und Modigliani (1972) eine Modellierung vor, die von Kimball (1993) erneuert wurde. Neben dem Rentensparen und der intergenerationellen Vermögensübertragung wurde das Vorsichtssparen stets als einer der Hauptgründe bei der Erklärung der Vermögensbildung angeführt. Über die Quantifi zierung der Vorsorgemaßnahmen der Sparer zur Absicherung ihrer künftigen Einkünfte gibt es eine umfassende empirische Fachliteratur, die aber keineswegs zu einem Konsens gelangt. Zum einen erhält man mit den Simulationsmethoden, bei denen (anhand realer Einkommensdaten) theoretische Modelle des Lebenszyklus zur Erklärung der Spartätigkeit der Haushalte kalibriert werden, einen Anteil des Vorsorgevermögens am Gesamtvermögen von ca. 50 %, während zum anderen die ökonometrischen Arbeiten eine Bandbreite von 1 % bis 20 % vorschlagen. Diese letzten Schätzungen scheinen angemessener zu sein, da eine Quantifi zierung des Grunds für das Vorsichtssparen von über 50 % bedeuten würde, dass die Hälfte der Vermögensungleichheiten einzig und allein mit der Vorsorge der Sparer erklärt werden könnte. Ziel unserer Arbeit ist es, den Grund für die Vorsorge der französischen Sparer gegen Risiken im Hinblick auf ihre künftigen Einkünfte anhand der Daten der Vermögenserhebung 2004 des Insee zu quantifi zieren. Die Beurteilungen solcher Unwägbarkeiten sind subjektiv, die sie von einem Mitglied des Haushalts für die kommenden fünf Jahre vorgenommen werden. Insbesondere betreffen sie die Wahrscheinlichkeit, den Arbeitsplatz zu verlieren, oder die möglichen Einkommensentwicklungen. Letztendlich scheinen die Gründe für das Vorsichtssparen bei den Franzosen begrenzt zu sein. Diese Spartätigkeit hängt zwar von der Art des angestrebten Vermögens, von der untersuchten Population, der Beurteilung der künftigen Einkommensrisiken und der Schätzmethode ab; der Anteil des Vermögens, das zum Schutz vor künftigen Einkommensrisiken gebildet wird, übersteigt aber nur selten 10 % des fi nanziellen oder gesamten Reichtums.

Determinants of investments in non‐farm assets by farm households

Off‐farm investment decisions of farm households are analyzed. Farm‐level data for a sample of Kansas farms observed from 1994 through 2000 are utilized. A system of censored dependent variable models is estimated to investigate the factors that influence the composition of farm households’ portfolios. The central question underlying the analysis is whether farm income variability influences off‐farm investment decisions. Previous analyses on the determinants of non‐farm investments have failed to consider the role of income variability. Results of this study indicate that higher farm income fluctuations increase the relevance of non‐farm assets in the farm household portfolio, thus suggesting these assets are used as farm household income risk management tools.

Wage arrears uncertainty and precautionary saving in Russia1

AbstractWage arrears are widespread in Russia, and are one of the main causes of uncertainty in the labour market. In this paper, we use the Russian Longitudinal Monitoring Survey over the period 1994–98 to construct a new and improved measure of household income risk, based on the uncertainty due to wage arrears. We then use this measure of uncertainty to test the precautionary saving hypothesis, according to which households save to self‐insure against risk. We find significant evidence of additional saving by those households whose head is more likely to suffer from wage arrears one year hence. This suggests the existence of a strong precautionary saving motive.