Income Shocks, Coping Strategies, and Consumption Smoothing. An Application to Indonesian Data

Using the Indonesian Family Life Survey, this study investigates whether Indonesian farmers respond differently to income shocks (crop loss) depending on the level of their asset ownership, and whether their responses are aimed at preserving consumption levels or at accumulating assets. We consider a framework in which assets contribute directly to the income generation process. In this context the need to accumulate assets to ensure future income may lead poor farmers (those with a low level of productive assets) to behave quite differently in terms of both their responses to shocks and their consumption decisions. For them transitory shocks may have long term consequences when the income loss leads to changes in their asset investment decisions. Our results suggest that while non-poor farmers smooth consumption relative to income, poor households use labor supply to compensate the income loss and, on average, they save half of this extra income. These results confirm the importance of savings for poor households, and highlight a crucial role for policies that support savings or, more precisely, the accumulation of productive assets.