Household Finance in Developing Countries: The Case of India
|Speaker:||Shekhar Tomar, Indian School of Business|
|Date: ||Friday 13 September 2019|
|Time: ||14.00 - 15.30|
|Location: ||Constantine Leventis, Building One|
The asset portfolio of households in developing countries is usually dominated by physical assets. We use a novel panel data on Indian households to document and explain their asset portfolio choice in response to income shocks. We find that though households hold a high share of gold and real estate, a majority of them participate exclusively in financial assets. We show that a single positive income shock increases household participation in financial assets while consecutive positive shocks increase their participation in real estate. Conditional on real estate purchase in past year, their probability to invest in all assets goes down in the next period, suggesting that households face adjustment costs in the real estate market. Counter-intuitively, an easier access to formal financial institutions increases household participation in the real estate. Put together, these findings dilute the lack of access channel behind the low share of financial assets in the household portfolio. These results are consistent with a standard model of portfolio choice where households face an adjustment cost to change their real estate holdings.