Consumption Smoothing in Metropolis: Evidence from Working-class Households in Prewar Tokyo

2023-11-24

AI Summary

This study examines how factory workers’ households in early-twentieth-century Tokyo achieved consumption smoothing amid income shocks, with particular focus on the role of informal credit in mitigating vulnerability among urban poor families. Leveraging newly digitized daily household budget survey data, the paper employs an instrumental-variable approach—using health shocks as exogenous variation—and conducts mechanism tests. Results show that food consumption exhibits extremely low elasticity with respect to short-term income fluctuations, and that trade credit extended by local retailers serves as the primary smoothing mechanism; retailers strategically forgo short-run profits in competitive markets to preserve long-term customer relationships. This study provides the first rigorous empirical evidence that informal credit networks enabled risk buffering among the urban underclass in modern East Asia—challenging the unidirectional “financial exclusion” narrative and highlighting the agency and institutional resilience embedded in grassroots financial practices.

Abstract

I analyzed the risk-coping strategies among factory worker households in early 20th-century Tokyo. I digitized and analyzed a unique daily longitudinal household budget survey to determine how consumption was impacted by idiosyncratic shocks. I found that while the households were so vulnerable that the shocks impacted their consumption levels, the estimated income elasticity for food consumption was relatively low in the short run. The analysis using adverse health shock confirms the robustness of the results. The result of mechanism analysis suggests that credit purchases with local retailers smoothed short-run food consumption. Despite the potential loss of profit, retailers in a competitive situation allowed consumers to trade on credit. This shows the roles of informal credit institutions in mitigating vulnerability among urban worker households.

Problem

• Examining consumption impact from shocks in working-class households
• Assessing short-run income elasticity for food consumption
• Exploring informal credit's role in smoothing food consumption

Innovation

• Digitized daily household budget survey data
• Analyzed impact of shocks on consumption levels
• Examined informal credit for consumption smoothing