Is consumption smooth at the cost of volatile leisure? An investigation of rural India
This study examines the institutions in rural India that enable households to insure against unanticipated idiosyncratic shocks to income. Using a decentralized general equilibrium model it tests for consumption and leisure insurance against unanticipated income shocks. It is found that differential access to markets (particularly financial markets) force villagers to differ in their response to similar shocks. Medium and large farmers have unrestricted access to credit markets and are unaffected by unanticipated changes in household income. The small farmers are excluded from credit markets. However, some of the small farmers are able to insure consumption against unanticipated income shocks through compensating changes in labour market participation and reducing own farm work.