Risk, Consumption Smoothing and the Family: Portfolio Management of Children and Assets in Rural Families

This paper analyses the kinds of risk faced by the family in a rural setting, sources of risk mitigation and the resulting derived demand for children by applying the principles of safety first and the portfolio choice theory. When incomes are uncertain, family designs a pbrtfolio of assets to smooth the consumption streams. Two principal forms of risk mitigation are the number of children and asset accumulation, which are risky investment. The family's problem is to avoid the disaster occuring. It is shown that,when parents are motivated to maximize the expected returns from these risky investments subject to the safety margin, the 'output' of children will be higher. When children are the only form of security or even if alternative forms of investment in physical and financial assets are available, the parents risk mitigation strategy leads to a demand for more number of children. Higher the demand for returns from investments, higher will be the demand for assets. Some supporting evidence for the conclusion have been derived from the available few studies in the Indian context.