Is Consumption Smooth at the Cost of Volatile Leisure? An Investigation of Rural India

This paper examines the institutions that enable households to insure against idiosyncratic risk. Using a decentralized general equilibrium model, I test for consumption and leisure insurance against unanticipated income shocks. I find 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. Small farmers and Landless workers are excluded from the credit markets. However, small farmers are able to smooth their consumption through compensating changes in labor market participation and reducing own farm work. The landless cannot vary their labor market participation and are left vulnerable to unanticipated income shocks