Notten, Geranda (2007). Managing risks: what Russian households do to smooth consumption. MGSoG Working Paper No. 004
The increasing availability of rich (panel) data provides many opportunities to test theories on consumption smoothing behaviour. At the same time, the informational requirements in terms of data and modelling are high and very context specific, thus requiring a filtering of essential explanatory ingredients. In this paper we show how conceptual and exploratory empirical analysis can contribute to this filtering process. We develop a conceptual framework to analyze possible smoothing arrangements of households distinguishing between various smoothing mechanisms, institutional smoothing partners and required assets. Subsequently, we apply this framework to Russian survey data to explore how Russian households may smooth consumption. We select and analyze a broad set of indicators from household survey data to study what actions Russian households take and how these actions reflect the existence and prevalence of particular smoothing channels. The results can be used to formulate hypotheses on household smoothing behaviour and to delineate the features of a more rigorous analysis. The picture that emerges is one in which financial markets play a limited role as a smoothing channel in Russia, regardless of the smoothing mechanism used (saving, lending, insurance). Instead, households seem to use internal strategies, their family, social networks and the state to smooth consumption through capital accumulation, gift giving, the provision of loans and (pension) benefits. Furthermore, we find some evidence that old age pensions may be used for intergenerational risk-sharing within families while other findings point towards the use of household food production as an income smoothing strategy as opposed to a shock-response strategy.
MGSoG Working Paper No. 004