Are poor households credit-constrained or myopic? Evidence from a South African panel

Credit constraints are an almost ubiquitous assumption in development economics. Yet direct evidence for credit constraints is limited, and many observations consistent with credit constraints are equally compatible with precautionary saving or myopic (non-forward-looking) consumption. Using household panel data and a source of widely anticipated income in South Africa, this paper first tests and rejects the standard consumption model with perfect capital markets. The standard model enriched with credit constraints is then contrasted with precautionary saving and myopic consumption as alternative explanations for the observed expenditure pattern. The standard model with credit constraints cannot be rejected in favour of precautionary saving or myopic consumption. ∗I am grateful for comments and insights from my thesis supervisors Tim Besley and Maitreesh Ghatak and from my examiners Greg Fischer and Stefan Dercon, as well as from Martin Browning, Daniel Clarke and participants at the CSAE seminar series and the CSAE Conference 2010. I also thank the Research Council of Norway and the British Academy for financial support.