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Deposit facilities and consumption smoothing: a dynamic stochastic model of precautionary wealth choices for a credit-constrained rural household

Gomez-Soto, Franz M.
http://rave.ohiolink.edu/etdc/view?acc_num=osu1181834440

Abstract Details

2007, Doctor of Philosophy, Ohio State University, Agricultural, Environmental and Development Economics.
This dissertation examines impacts of convenient access to safe deposit facilities on a poor rural household’s precautionary wealth and consumption smoothing. Access is measured by transaction costs. Safety results from the probability of bankruptcy of the deposit-taker in case of a local systemic shock. Two exercises are developed. First, transaction costs are incorporated in Samuelson’s (1969) two-period stochastic model on asset portfolio decisions. A critical value for transaction costs makes the household indifferent between investing only in a risky asset and diversifying at a transaction cost. The magnitude of this critical cost reveals a high willingness to pay for diversification. Second, a dynamic, stochastic, infinite horizon model of wealth choices for a credit-constrained household with a precautionary motive is developed. Labor income is stochastic, precautionary wealth can be diversified between two risky assets, and there is a covariance between labor income, the price of livestock, and the effect of a local systemic shock on the solvency of the deposit-taking institution. Numerical methods are used to approximate a solution for the Bellman equation. Simulations are performed for the transaction cost parameter, bankruptcy risk, environmental riskiness, risk aversion, and discount rate. In the certainty-equivalent steady state, only livestock is held, but introducing risk generates level and composition effects on precautionary wealth. Lower transaction costs increase the level of wealth and the share of deposits, allowing consumption smoothing (reduced variance). Reductions that leave transaction costs high have insignificant effects, but beyond a threshold further reductions rapidly increase deposits. The risk of bankruptcy greatly discourages holdings of deposits and livestock. Risk aversion and impatience -associated with poverty- influence deposit holdings in opposite directions. The more risk averse and less impatient the household is, the more it demands deposit facilities. Convenient and safe facilities lower the costs of holding precautionary wealth for both prudent and impatient households and improve welfare. At the household level, the importance of deposits increases with the riskiness of the environment and fragmentation in the economy. At the economy’s level, deposit mobilization is critical for financial intermediation. Deposit mobilization is seldom considered, however, among the ingredients of a rural development strategy.
Claudio Gonzalez-Vega (Advisor)
191 p.
Economics, Finance
Consumption smoothing; precautionary wealth; deposit mobilization; systemic risk; dynamic optimization

Recommended Citations

Citations

  • Gomez-Soto, F. M. (2007). Deposit facilities and consumption smoothing: a dynamic stochastic model of precautionary wealth choices for a credit-constrained rural household [Doctoral dissertation, Ohio State University]. OhioLINK Electronic Theses and Dissertations Center. http://rave.ohiolink.edu/etdc/view?acc_num=osu1181834440

    APA Style (7th edition)

  • Gomez-Soto, Franz. Deposit facilities and consumption smoothing: a dynamic stochastic model of precautionary wealth choices for a credit-constrained rural household. 2007. Ohio State University, Doctoral dissertation. OhioLINK Electronic Theses and Dissertations Center, http://rave.ohiolink.edu/etdc/view?acc_num=osu1181834440.

    MLA Style (8th edition)

  • Gomez-Soto, Franz. "Deposit facilities and consumption smoothing: a dynamic stochastic model of precautionary wealth choices for a credit-constrained rural household." Doctoral dissertation, Ohio State University, 2007. http://rave.ohiolink.edu/etdc/view?acc_num=osu1181834440

    Chicago Manual of Style (17th edition)

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This open access ETD is published by The Ohio State University and OhioLINK.