Wealth, risk and activity choice: cattle in Western Tanzania

Abstract

Imperfect credit markets force households to use their savings for investment. Profitable activities often require lumpy investments, limiting entry by poorer households, resulting in increasing welfare differences. In Tanzania, cattle are a profitable but lumpy investment and a liquid asset for consumption smoothing. Richer households own substantial cattle herds, while poorer households specialize in low return, low risk activities. A dynamic programming model and simulations are presented to analyze entry into asset accumulation under income risk. The evidence suggests that households with lower endowments are less likely to own cattle and returns to their endowments are lower.