Seasonality, precautionary savings and health uncertainty: Evidence from farm households in central Kenya

The high prevalence of risks in low income economies makes managing uncertainty critical for productivity and survival. This paper analyzes seasonal changes in farm households’ per capita consumption and saving in response to weather and health shocks. Using a sample of 196 households in central Kenya, it tests the notion that people save most of their transitory income, and examines their precautionary saving motives. The results show that the propensity to save out of transitory income is about a fifth of what the permanent income hypothesis postulates. The propensity to save differs by wealth, with the poor exhibiting stronger precautionary motives towards rainfall variability. But the wealth effect is weak, suggesting that the asset base is vulnerable even for the better-off. However, precautionary savings tend to increase with wealth among HIV/AIDS affected households. Since illness is associated with higher consumption, and therefore less investment, we find more volatile consumption for HIV/AIDS affected households.