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Abstract
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.