Asset smoothing, consumption smoothing and the reproduction of inequality under risk and subsistence constraints

By F. Zimmerman, Michael R. Carter. 2003

679 citations recorded by the source corpus.

Abstract A growing literature asks whether low-wealth agents can accumulate assets over time or whether they are trapped in poverty. This paper develops a stochastic dynamic programming model with endogenous asset price risk to explore savings and portfolio decisions in a resource-poor environment characterized by risk and subsistence constraints. Optimal portfolio strategies are found to bifurcate, despite divisible assets and fully rational agents. Wealthier agents acquire a higher-yielding portfolio and pursue conventional consumption smoothing. Poorer agents acquire a less remunerative portfolio and pursue asset smoothing, rather than consumption smoothing. Asset-based risk coping thus results in positive correlation between initial wealth and portfolio rate of return.

Subfields: Accounting, Sociology and Political Science, Soil Science

View Paper: https://www.semanticscholar.org/paper/19b4145487645117ddee9dd2baa6dfae3a0d265c

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Citations in the corpus

Impact of Village Savings and Loan Associations: Evidence from a cluster randomized trial (2016, background): “…level of risk but higher expected returns, this can lead to increased consumption in the long run even if the insurance itself never has to pay out (Carter and Zimmerman, 2003; Dercon, 1996). credit for pro ﬁ table business purposes, an expansion in access to credit increases household income.”
Shocks and their consequences across and within households in Rural Zimbabwe (2006, background): “First, as noted by Zimmerman and Carter (2003), different households may indeed respond differently to income shocks depending on the level of their asset holdings.”
Consumption risk, technology adoption and poverty traps (2007, background): “Zimmerman and Carter (2003) simulate for example that, even when assets are divisible and agents fully rational, optimal portfolio strategies bifurcate in resource-poor, risky environments with subsistence constraints and imperfect credit and insurance markets.”
Is resilience socially constructed? Empirical evidence from Fiji, Ghana, Sri Lanka, and Vietnam (2016, neutral): “Wealth matters: It is often hypothesized (e.g. Zimmerman and Carter, 2003) that households may respond differently to shocks depending on their level of asset holdings.”
Household income strategies and natural disasters: Dynamic livelihoods in rural Nicaragua (2010, background): “In a high-risk environment, peoplemay diversify or skew towards low-risk low-return activities to avoid losses (Ravallion, 1988; Rosenzweig and Binswanger, 1993; Morduch, 1995; Dercon, 1998, 2002; Zimmerman and Carter, 2003; Carter and Barrett, 2006).”
Managing vulnerability to drought and enhancing livelihood resilience in sub-Saharan Africa: Technological, institutional and policy options (2014, background): “However, the indirect effects of drought on environmental degradation and reduced household welfare through its impact on crop and livestock prices could be larger than its direct effects (Zimmerman and Carter, 2003; Holden and Shiferaw, 2004).”
The economics of poverty traps and persistent poverty: An asset-based approach (2006, background): “Zimmerman and Carter (2003) identify a Micawber threshold, the critical asset threshold below which it is no longer rational or feasible to pursue the autarchic accumulation strategy.”
Welfare dynamics in rural Kenya and Madagascar (2006, background): “A small literature demonstrates that in the presence of highly stochastic income, risk preferences, subsistence constraints or both can induce poorer households to trade off expected income growth for reduced income volatility, relative to wealthier households (Rosenzweig and Binswanger, 1993; Carte”
The Economics of Poverty Traps and Persistent Poverty: Empirical and Policy Implications (2013, background): “For each ability level, this line defines the ‘Micawber Threshold’ (MT) (see Carter & Barrett, 2006; Zimmerman & Carter, 2003).”
Poverty Traps and Climate Risk: Limitations and Opportunities of Index-Based Risk Financing (2007, background): “Moreover, these informal mechanisms tend to fail in the presence of large covariate risks (Zimmerman and Carter 2003; Townsend 1994; Rosenzweig 1988; Rosenzweig and Binswanger 1993; Dercon 1996) and can be compromised by the existence of threshold-based poverty traps (Santos and Barrett 2006b).”
Linkages between Land Management, Land Degradation, and Poverty in Sub-Saharan Africa: The Case of Uganda (2008, background): “…models have explained this phenomenon of " asset smoothing " (as opposed to the more commonly understood phenomenon of consumption smoothing) as resulting from disaster avoidance by very poor households facing survival risks (Fafchamps and Pender 1997; Dercon 1998; Zimmerman and Carter 2003).”
Poverty Traps and Safety Nets (2006, background): “…the use of asset stocks to buffer consumption against stochastic income, an important subliterature addresses the somewhat more complex problems associated with asset risk among poor populations (Dercon 1998, Carter and May 2001, Zimmerman and Carter 2003, McPeak 2004, Lybbert et al. forthcoming).”
Rural livelihoods and poverty reduction policies. (2005, neutral): “They willingly destabilize consumption in order to protect assets so as to minimize the probability of suffering irreversible asset shocks in the next period (Zimmerman and Carter 2003; Barrett et al. 2003a).”
Assets, Shocks, and Poverty Traps in Rural Mozambique (2012, methodology): “These dynamics have been conceptualized by Carter and others in an asset-based approach to poverty (Carter and May 2001; Carter and Barrett 2006; Carter et al. 2007; Zimmerman and Carter 2003).”
Migratory Responses to Agricultural Risk in Northern Nigeria (2011, neutral): “…subsist during transitory shocks (Rosenzweig and Wolpin 1993; Fafchamps, Udry, and Czukas 1998; Kazianga and Udry 2006; Quisumbing 2008), and invest in low-risk, low-return investments to mitigate risk over time (Eswaran and Kotwal 1990; Rosenzweig and Binswanger 1993; Zimmerman and Carter 2003).”
Economic Value of Seasonal Climate Forecasts for Agriculture: Review of Ex-Ante Assessments and Recommendations for Future Research (2008, background): “Morduch 1990, personal communication), underuse of fertilizers (Bliss and Stern 1982, chapter 8; Binswanger and Pingali 1983), and shifting from productive to nonproductive but more liquid assets as precautionary savings (Paxon 1992; Zimmerman and Carter 2003; Fafchamps 2003).”