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In many low-income countries, a large proportion of the population depends on agriculture for its primary means of support, whether through subsistence agriculture, the production of cash crops, or as hired farm labor. However, agricultural yields and the demand for agricultural labor can be extremely volatile, especially due to weather conditions. Furthermore, while the optimal consumption stream for households entails some appropriate smoothing over states of nature and across time, it has long been recognized that many of the usual mechanisms for doing so (credit and insurance markets) are often quite limited in such economies. While there may exist nonmarket mechanisms, many shocks to agriculture such as weather or pests cannot be insured against locally through these channels, since they affect most people in a given region.
Several studies have tested the hypothesis of perfect insurance in developing countries, for example, Robert Townsend (1994) for India, and Angus Deaton (1992) and Franque Grimard (1997) for Cote d'Ivoire. Most studies reject perfect insurance but find evidence of some consumption-smoothing. However, considerably less attention has been devoted to the consequences for children of the limited ability of households to transfer resources across time or states of nature. Investments in children and the development of human capital are the cornerstones of enhancing well-being and breaking the cycle of intergenerational transmission of poverty, and they are also central to national growth and economic development. However, such investments may require substantial cash outlays. The main interest is whether volatile income in an environment of incomplete insurance or capital markets leads to lost opportunities for such investments. If households cannot borrow or save, they must finance a given period's investment out of current-period income, and a large negative income shock could lead to a reduction in current-period investment in children. For example, Hanan Jacoby and Emmanuel Skoufias (1997) find that income fluctuations among households in India lead to variability in school attendance, and Andrew Foster (1995) concludes that credit-market imperfections influenced the impact of a flood on children's weight in Bangladesh.
In this paper, I explore this hypothesis for Cote d'Ivoire. Over 70 percent of Ivorian households earn their primary source of income from agriculture, especially in the smallholder production of cash crops such as cocoa, coffee, and cotton, or as...