Essays on Economics of Rural Households in Developing Countries

This dissertation consists of two essays on behaviors of rural households in developing countries in response to their unique economic circumstances. These rural households in developing countries are specifically different from their developed counterparts in how they earn their livings. Rather than being a simple wage earner with a single income source, a typical rural household generally engages in both formal wage labor market and other income generating activities, such as farming, raising livestock, or running a small business, at home. Chapter 1 focuses on labor supply responses as consumption smoothing mechanisms against wage and productivity shocks. Chapter 2 analyzes the responses of household durable consumption and business investment in respond to a credit shock. Chapter 1 investigates the link between consumption change and changes in wages and productivities among households in developing countries. These households generally participate in both a wage labor market and home production activities. For my investigation, I use a reduced-form framework that features households making consumption, savings, and labor supply decisions, at both the intensive and extensive margins. They make these decisions in both the wage labor market and production sectors, in the presence of co-moving wage and productivity shocks. A reduced-form model, including a home production function, is estimated using panel data from Thai villages. The data comprises consumption, assets, labor hours, and earnings in both labor market and home production. Unobserved productivities for non-participants in production are jointly estimated with model parameters through a Markov Chain Monte Carlo technique. I focus on labor supply responses on both labor market and production sectors as consumption insurance mechanisms. Overall, I find evidence of strong consumption smoothing to both wage and productivity shocks. Labor supply decisions, on both extensive and intensive margin, respond to both shocks, and indeed account for significant portions of consumption insurance. Chapter 2 investigates the underlying life-cycle patterns of Thai households' durable expenditures and business investment. I found that durable expenditures were highest among younger households while business investments were highest among middle-age households. I then built a three-asset heterogenous agent life-cycle model that performs reasonably well in matching these life-cycle patterns in the data. Next, I investigated the impact of Thailand's “Million Baht Village Fund” program, Thailand's large-scale credit injections in 2002, on durable expenditures and business investments. The main empirical findings were that households responded significantly to credit injection by purchasing household durables rather and investing in household business. The latter was the intended purpose of the credit injection program. Further, a simulation exercise on relaxation of credit constraint based on proposed structural model was able to capture the qualitative difference in life cycle patterns among participants and non-participants of the credit injection program