Household Responses to Shocks in Rural Ethiopia

This paper uses a stochastic dynamic
programming model to characterize the optimal
savings-consumption decisions and the role of livestock
inventories as a buffer stock in rural Ethiopia. The results
show that relatively land-rich households use accumulation
and liquidation of cattle and other animal inventories for
partial consumption smoothing, while low-income households
appear not to do so. The results highlight the need for
improvement in livestock markets, which are often affected
by high transaction costs and price risk, and for
investigation of other approaches to risk management.