Households as Corporate Firms: Constructing Financial Statements from Household Surveys

Authors: Krislert Samphantharak and Robert M. Townsend (April 2008)

Abstract: Abstract We use and modify the rigorous standards of corporate financial accounting to create the balance sheet, income statement, and statement of cash flows for households in developing countries. The purpose is to better measure productivity, risk, financing, and portfolio management in an analysis of high frequency panel data. What emerges is an analogy between households and corporate firms. For example, household wealth can be viewed as equity, consumption as dividends, gifts as equity issue, and the household budget constraint as the firm cash flow constraint. The accounts also allow us to distinguish savings as a budget surplus as in the cash flow statement versus savings as wealth accumulation as in the balance sheet. We show how to use a high frequency household survey that contains a series of detailed questions to create the line items of each of the financial statements, and we propose accounting procedures to deal with nontrivial issues: multiperiod production activities, storage, inventories, livestock aging, loan repayments, barter transactions, gifts and transfers, owner-produced consumption and other intra-household transactions. We then show how to use the accounts to analyze the rate of return to production activities, the debt to wealth ratio, and the movement of both consumption and investment to income. Finally, we show how to use the statement of cash flows to decompose and quantify household budget deficits into their various financing components and show how to apply the balance sheet to study household portfolio management. In a featured application, we use line items in the various accounts to study the sensitivity of investment to cash flow while controlling for productivity, examining in particular the role of family networks. The conceptualization of this monograph has important implications for measurement, questionnaire design, the modeling of household decisions, and the analysis of panel data, which we discuss in detail in a concluding section.

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