Understanding Household Consumption Behaviour: What do we Learn from a Developing Country?

Abstract

Abstract Understanding and changing household consumption behaviour are considered the core driving force of the economic growth of a nation. Vietnam’s economic growth is mainly driven by final household consumption, which constituted over two-thirds of GDP during the last three decades. This paper aims to provide a novel way to understand household consumption decisions in a developing country based on several different but inter-related economic hypotheses of household consumption behaviour. Using a three-wave balance panel dataset constructed from nationally representative Vietnamese household surveys, we find strong evidence to support the importance of the permanent income hypothesis, the life-cycle factor hypothesis and the precautionary savings hypothesis. However, there is no evidence for the sex ratio hypothesis. Addressing the shortcomings of previous studies, this paper confirms the entry and exit of formal sectors and agriculture are the oriental predictors of precautionary motives. Heterogeneity analysis suggests the effect is fairly stable across balance sheet characteristics but varies across consumption categories. Our results are robust to a variety of robustness checks. These findings highlight the importance of combining a wide range of proxies for job insecurity and uncertainty indicators to understand household consumption behaviour, thus providing a powerful test of consumption and savings theories in short panels. The implications of these findings also are discussed and proposed in this research.