The nature and causes of coping strategies among low-income rural households

Despite all the advances in technology, agricultural intensification and government sponsored development programs, weather-induced farm failure and consumption shortfalls are recurrent problems for most agrarian households in low-income countries. Faced with seemingly inevitable consumption shortfalls, households and agrarian communities have developed an impressive array of mechanisms for buffering income and consumption variability such that, on balance, the impact of adverse activity or crop season is neutralized or at least dampened by the impact of another activity or of a good season. This dissertation examines the nature and causes of these coping strategies among low income rural households. The study finds that transaction costs, in addition to uncertainty of yield, explain the diversity of coping strategies. Economic models that incorporate both these aspects become analytically intractable and numerically cumbersome. Alternatively, it was shown how institutional economics can be used to illustrate the emergence of coping strategies under uncertainty and transaction costs. Three models were constructed by incorporating transaction costs and uncertainty: (a) a two-period model with transaction costs; (b) a two-period model with uncertainty; and (c) a multi-period model with uncertainty. Numerical simulations were used as a way of characterizing solutions. The model incorporating transaction costs suggests that as long as wedges between buying and selling prices are positive, households are better off with minimal consumption smoothing. However, if they expect a farm failure, the motive of consumption smoothing may dominate the effect of transaction costs leading to high saving rates per unit of income. It was also shown that households switch from non-market to market insurance as transaction costs decline. With uncertainty, it was found that, as weather-induced yield uncertainty rises, households switch from the family farm to the use of common property resources and finally to off-farm activities including outmigration. But those households living in marginal lands cannot rely on the family farm even at a moderate level of uncertainty. It was also found that households adjust their consumption downward with rising weather-induced yield uncertainty. The model also shows that the marginal buffer values of coping strategies rise with increasing yield variability. The multi-period model explains how credit constraint and initial wealth position can affect consumption paths over time.