Risk is a central fact of life in the rural areas of less developed countries. There is a vast, mainly theoretical literature that explores the consequences of risk for individual behavior and the evolution of institutions. In the absence of complete insurance markets, households utilize a variety of economic strategies in order to mitigate the consequences of risk. The purpose of this project is to analyze the joint saving and credit market decisions made by households as they attempt to cope with risk in a social setting characterized by an important, but incomplete mutual insurance network in northern Nigeria. Saving and credit transactions take on a special role when insurance markets are incomplete by allowing households to smooth their consumption streams in the face of random income fluctuations. This issue will be analyzed using data collected in a nine-round survey of the region in 1988-1989. This rich data set will permit an investigation of the ex post strategies adopted by households in response to the recent receipt of random shocks. The analysis will be based on joint estimation of the effect of random shocks on net asset sales and net borrowing, taking into account the structure of the credit market revealed in earlier work. An understanding of the magnitude of the consumption- smoothing motivation for asset accumulation is a prerequisite for a more general analysis of the level and composition of rural investment. In addition, the findings should contribute to current discussions regarding interventions designed to reduce the vulnerability of households to drought.
