When Faced with Income and Asset Shocks, Do Poor Rural Households in Vietnam Smooth Food Consumption or Assets?

Vietnamese rural households are exposed to severe covariate and idiosyncratic shocks. However, these households are remarkably resilient and have steadily increased real income and consumption over the survey period 2006 to 2012. To explain household strategies to cope with shocks we test three theoretical models: the Permanent Income Hypothesis (PIH), Complete Market Hypothesis (CMH), and Asset Smoothing Theory (AST). There is support for AST as households smooth productive assets rather than consumption; and for CMH as households smooth consumption against idiosyncratic, but not covariate shocks. There is no support for PIH.