Household Finance in Developing Countries: Evidence from India

71 Pages Posted: 15 Jan 2020

See all articles by Pawan Gopalakrishnan

Pawan Gopalakrishnan

Reserve Bank of India

S.K. Ritadhi

University of California, Berkeley - Department of Agricultural & Resource Economics; Ashoka University

Shekhar Tomar

Indian School of Business

Date Written: December 27, 2019

Abstract

This paper studies how adjustment costs in real estate investments affect portfolio choices of developing economy households. Using novel panel data on Indian households, we document that while most households hold outstanding investments in real estate, the majority of them participated exclusively in financial assets during the five year survey period. We explain these stylized facts by identifying how households allocate their marginal income across various assets. Using local rainfall shocks as a source exogenous variation in household incomes, we empirically establish the presence of adjustment costs in real estate, which drives the infrequent participation of households in this asset class. We further show that the households use financial assets as a transitory asset class on their way to accumulating real estate. Our results are consistent with a theoretical model of portfolio choice where households face an adjustment cost to re-adjust their lumpy real estate holdings.

Keywords: Household Finance, Portfolio Choice, Financial vs. Physical Assets, Adjustment Costs

JEL Classification: D14, D15, O16

Suggested Citation

Gopalakrishnan, Pawan and Ritadhi, S.K. and Ritadhi, S.K. and Tomar, Shekhar, Household Finance in Developing Countries: Evidence from India (December 27, 2019). Indian School of Business, Available at SSRN: https://ssrn.com/abstract=3510006 or http://dx.doi.org/10.2139/ssrn.3510006

Pawan Gopalakrishnan

Reserve Bank of India ( email )

Shahid Bhagat Singh Marg, Fort
Mumbai
Mumbai, Maharashtra 400001
India

HOME PAGE: http://sites.google.com/view/pawangk/

S.K. Ritadhi (Contact Author)

Ashoka University ( email )

Plot #2,
Rajiv Gandhi Education City
Kundli, 131028
India

HOME PAGE: http://https://www.ashoka.edu.in/welcome/faculty#!/sk-ritadhi-1691

University of California, Berkeley - Department of Agricultural & Resource Economics ( email )

Berkeley, CA 94720
United States

Shekhar Tomar

Indian School of Business ( email )

Hyderabad, Gachibowli 500 019
India

HOME PAGE: http://shekhartomar.com

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