Analysing the impact of idiosyncratic and covariate shocks on households’ food and non-food consumption: empirical evidence from Benazir Income Support Program

In many developing countries, poor households face multiple shocks that disrupt their consumption patterns and lead to an increased welfare loss. Consequently, households adopt coping mechanisms that negatively impact their overall well-being. While social safety nets have been implemented to protect vulnerable households, it is essential to assess their overall effectiveness, both in terms of their impact and their potential to replace the harmful coping strategies adopted by households. Therefore, the primary objective of this study is to examine the impact of cash transfers provided by the Benazir Income Support Program (BISP) on the consumption patterns of households in Pakistan, with a particular emphasis on how these transfers provide consumption insurance to ultra-poor families encountered with idiosyncratic and covariate shocks. The study analyzes both food and non-food expenditure to gain insights into the effectiveness of the program in providing economic security to vulnerable households. Using three rounds of the BISP survey (2011–2013–2016), the empirical analysis is done by employing regression discontinuity design (RDD), difference-in-difference (DID) technique, and ordinary least squares method. Using the DID approach, we find that from 2011 to 2016 the overall food and non-food consumption of BISP beneficiaries have increased considerably and these results are highly significant as well. However, the estimates for RDD are not significant for the years 2013 and 2016. We also observed households’ consumption behavior in the presence of shocks and found that in the wake of idiosyncratic shocks, poor households can protect their consumption through informal transfer mechanisms by securing loans from family, friends, and landlords. However, this mechanism collapses when households encounter covariate shocks. Furthermore, BISP cash transfers are primarily effective in mitigating the impact of employment loss, loss of livestock, and the rise in food prices and remain inadequate in providing insurance against major other shocks encountered by the targeted poor households. The results indicate that BISP has the potential to substitute informal coping strategies used by the poor, it requires substantial transfers to offer comprehensive consumption insurance to the poorest of the poor in Pakistan.