CitationNull, Claire (2007). Methods of consumption smoothing: coping with pension arrears in post-Soviet Russia.
AbstractThe fact that households smo oth their consumption has been well-documented in the empirical literature. However, relatively little evidence exists to explain how such smoothing is attained. In this pap er we employ a rich dataset of financial transactions to investigate how households respond to exogenous income shocks. Specically, we consider a range of income sources and expenditures recorded by a panel of Russian households with pensioners between 1995 and 2000. Using pension arrears as a source of exogenous variation in income, we are able to observe participation in informal risk-sharing networks as well as formal insurance schemes, b orrowing and lending, saving and asset depletion, and changes in income from lab or, farming, and government transfers. We exploit a simple accounting identity that allows us to account for the endogenous nature of the complete set of finanancial transactions employed by a household. We begin by estimating a household-level fixed effect model and investigate whether transaction use differs across several household demographics. We then relax the assumption that all households follow the same decision-making pro cess and consider a random coefficients estimator. We provide some evidence that our results are robust to attrition bias. To the extent that households only allocate roughly 1/6 to 2/5 of pension income to consumption expenditures, they must b e putting the remaining share into another type of transaction that helps to smo oth consumption. However, our results do
not conclusively identify transaction use other than to show that lab or income is a substitute for pension income. A random coefficients analysis indicates that choice of smoothing mechanisms may to b e more idiosyncratic than a fixed effects estimating framework is equipped to deal with.