Crisis and Consumption Smoothing

The dramatic impact of the current crisis on performance of businesses across sectors and economies have been headlining the business press for the past many months. Extant reconciliations of these patterns in the popular press rely on ad-hoc reasoning. Using historical data on currency crisis episodes across the world, we examine how consumers respond to a crisis and identify interesting patterns in consumer behavior. The results reveal that consumer behavior in a crisis is characterized by consumption smoothing at various levels – inter-temporal, inter-category and intra-category. These behavioral adjustments result in significant reallocation of consumption expenditures. More importantly, the smoothing decisions due to a crisis are distinct and independent of the impact of changes in income and prices that accompany a crisis. Interestingly, there is marked variation in the patterns of consumption smoothing across different types of economies. Taken together, these results have important and interesting implications for managers, policy makers and academics. Acknowledgements: We would like to thank Anant Arun, Simon Benarroch, Henry Briggs, Christophe Le Caillec, Tat Chan, Marnik Dekimpe, Bob Herbold, Vish Iyer, Alex Lambeek, Sridhar Narayanan, Narayan Pant, Vithala Rao, Victor Saeijs, K. Sudhir, Naufel Vilcassim, Robert Weltevreden, Horatio Zhu and seminar participants at the INSEAD Marketing Seminar Series (2008), Singapore Marketing Research Rountable (2008) and Summer Institute of Competitive Strategy (2008) for their comments and suggestions. We gratefully acknowledge the considerable assistance of Ilian Mihov on econometrics issues.