Ex ante and ex post labor supply responses to risk in a low-income area

Cultivating households in developing countries face substantial income risk because weather, an input to agricultural production, is variable and opportunities to insure against income fluctuations are limited. This dissertation is an empirical examination of the ex ante effect of the riskiness of the distribution of rainfall as well as the ex post effect of the realization of weather shocks on the labor supply decisions of cultivating households in India. The associated profit responses, along with the roles of resources such as irrigation, credit and non-agricultural employment opportunities in modifying the responses to risk, are also tested. Two models of the effects of risk on labor supply are used to derive the appropriate tests of the risk effects: a one period model using comparative statics under uncertainty, and a stochastic dynamic programming model. Two sets of panel data, the Additional Rural Incomes Survey, and District Level Data, are merged to test the models using standard fixed and random effects techniques for the profit equation and the fixed effects tobit described in Honore (1992) for the labor income equation. The results are that more risk, bad weather, and low rainfall all increase labor supply at the expense of profits. Irrigation and the availability of banks reduce the effects of the weather on production, the presence of moneylenders in the village acts as insurance by providing loans for ex post consumption smoothing, and the accessibility of a factory or small-scale industry magnifies all of the risk effects by decreasing the extant to which the market wage responds to the weather. Associated analyses of the determinants of total income, labor market participation, wage rates, net labor supply and cropped area further support the results. In conclusion, since the presence of risk and availability of resources to cope with risk with affect agricultural incomes and the allocation of labor across activities, risk implications should be considered in the evaluation of institutions in developing countries