On the joint determination of safety nets and living standards: Evidence from a pseudo-panel of Ghanaian household data

Type Working Paper
Title On the joint determination of safety nets and living standards: Evidence from a pseudo-panel of Ghanaian household data
Author(s)
Publication (Day/Month/Year) 2009
URL http://www.pegnet.ifw-kiel.de/event/conference-2009/program-and-papers/molinivasco_draft_july31.pdf
Abstract
Empirical research has shown that households involved in low-risk low-return subsistence activities, once protected by a safety net, opt for activities which, although involving higher risks, yield a higher average income. This paper expands on existing theoretical advances and applies an innovative empirical strategy to contribute to an understanding of the joint determination of safety nets and income profiles in developing countries. In particular we analyze how participation in a safety net scheme influences household decisions whereby the household might consider shifting to a riskier production pattern which may ultimately lead to a higher living standard. This is because in choosing this new production pattern when protected by the safety net, the household experiences a reduction in its vulnerability and also improves its capacity to cope with moderate shocks, because of the higher expected income. However, as households no longer rely on subsistence cropping, the adverse impact of shocks can potentially become severe thereby necessitating an update of the safety net, which, may induce further changes in production patterns. In this paper we describe this iterative process by considering the joint determination of income profiles and the safety net. Another innovation of the paper is the way of testing the extent to which households alter their behavior in response to a safety net, a contribution to the limited empirical studies on the issue, especially in Sub-Saharan Africa where widespread safety nets are rare and data sources that allow for such tests are few. We do this by focusing on Ghana, and try to find an empirical approximation of the construct of safety nets and income profiles using five rounds of cross-section household surveys. Remittances are used as a proxy for protection under a typical safety net arrangement. Specifically we pool the five surveys of Ghanaian households, construct a pseudo-panel based on demographic and geographical characteristics, and use this to investigate whether access to remittances impacts on households’ income profiles. Findings confirm that access to remittances encourages households to undertake more remunerative albeit riskier activities.

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