Abstract:
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For the first time, this paper uses three-wave Thai household panel data for the entire country over the period 2005 to 2007 to investigate the impact of income shocks and income uncertainty on Thai agricultural households based on the permanent income hypothesis (PIH) and precautionary saving hypothesis. It then tests their consumption smoothing mechanisms both over time and across households. The general objective of the study is to test the PIH and precautionary saving hypothesis; specifically to test the impact of income shocks and income uncertainty on agricultural household consumption and then to examine how Thai agricultural households respond to these shocks. The empirical results reveal that the consumption behavior of Thai agricultural households is less consistent with the PIH. On the other hand, Thai agricultural households clearly exhibit precautionary saving motives behavior both in the entire country and in most regions. No impact is found of idiosyncratic shock, proxied by illness of household head, on the households in any region. On the contrary, with idiosyncratic shock, the regression results show an overwhelmingly significant relationship between aggregate shocks, proxied by village-year (tambon) dummy variables with household consumption in every region. Consequently, with the first results then, the consumption smoothing mechanisms of Thai agricultural households are examined through two main mechanisms: that is, savings, and borrowings, since they are expected to be a primary mechanism that most households should initially implement. Regressing through the three-wave Thai household panel data, we find that, overall, Thai agricultural households heavily depend on their saving mechanism in smoothing their consumption in the face of income shocks due to rainfall variation, while there is little evidence for using borrowings, either in the entire country or each region. The results also show that savings have a significant relationship with variance of income in every region, whereas households response no to future income uncertainty by borrowings in any region. It is also found that no households in any region use savings or borrowings to smooth their consumption due to the idiosyncratic shock proxied by illness of household head. On the contrary, with the idiosyncratic shock, the regression results still show still a significant relationship between aggregate shocks proxied by village (tambon)-year dummy variables with savings and borrowings in every region, as found in the consumption equation. In addition to the test of consumption smoothing over time through saving and borrowing mechanisms, consumption smoothing across households is also examined through risk sharing models. Three models are tested regarding this objective; that is, a test of full insurance, a test of partial insurance, and a test of risk sharing through risk sharing instruments. The null hypothesis of full insurance against income risk is rejected for the whole country, together with the group of Central, Eastern, and Western regions. Household consumption appears to be better insured in the group of Central, Eastern, and Western regions than for the entire country. Consequently, with the test of full insurance, further study support the existence of evidence of partial insurance and community risk sharing for the entire country, except for the group of Central, Eastern, and Western regions. Additionally, in order to examine how income risks are actually shared, it is also found that these income shocks are insured by transfer receipts from household nonmembers for the entire country, as well as for the Southern and Northeastern regions.
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