High-frequency data show that the material condition of poverty is only partly captured by overall insufficiency of resources. Instead, life in poverty is often characterized by the interaction of insufficiency × instability × illiquidity, visible when measuring poverty in shorter time units than the year. In this context, reducing instability and/or illiquidity can reduce exposure to poverty even when average earning power (overall insufficiency) is unchanged. The high-frequency view shows the power of intra-year consumption smoothing, while also showing that consumption smoothing often requires the spiking of spending. The instability revealed by the high-frequency view creates a tension between flexibility and structure in the design of behavioral financial products. In practice, microfinance borrowing and saving are often used to address the ups and downs of household spending needs rather than business needs. High-frequency instability also explains why ex post moral hazard (“strategic default”) is a particular problem for lenders (rather than the textbook ex ante moral hazard depiction) and, in turn, why joint liability is difficult to sustain. The installment structure of typical microfinance loan contracts (i.e., high-frequency repayments) is similar to the structure of consumer lending products and contractual saving products, explaining how microfinance loans work naturally for purposes other than business investment, even when that departs from lenders’ nominal intentions. The high-frequency view helps to show why microfinance loans remain popular as financial tools despite modest measured impacts on average household income.
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Viewing all posts with tag: Volatility
US Financial Diaries Household Profile: Extended Family Strives to Get Ahead
The Rodriguez family is a multigenerational household living in a small town near San Jose, California. Maria Rodriguez, 60 years old, lives with her husband Dean, 75; her mother, Regina, 83; and her two sons, Martin, 36, and Daniel, 34. The Rodriguez household’s financial health reflects a series of fortuitous circumstances and good but imperfect choices – many of which represent themes that are echoed throughout the US Financial Diaries.
Income Gains and Month-to-Month Income Volatility: Household evidence from the US Financial Diaries (Working Paper)
The US Financial Diaries track the finances of a small sample of low and moderate-income households over a year. The households faced substantial swings in income from month to month. On average, they experienced 2.5 months when income fell more than 25 percent below average.
US Financial Diaries Issue Brief: Spikes and Dips: How Income Uncertainty Affects Households
When asked whether “financial stability” or “moving up the income ladder” is more important, 77% of the participants in the U.S. Financial Diaries (USFD) research study chose “financial stability.” This response illustrates the high level of financial uncertainty and unpredictability that these households face. Many factors contribute to feelings of financial instability: insufficient income, unpredictable expenses, a lack of savings, inadequate financial management, and reliance on complicated or poorly designed financial products and services. This research note focuses on how people earn and receive income.
Income Smoothing and Consumption Smoothing
Two observations are essential to understanding the market structure of most low-income economies. First, many markets do not exist and, of those that do, many work imperfectly. Second and more optimistically, a wealth of behavioral and institutional responses often emerge to fill in the holes left by market failures. . .