image: "Households as Corporate Firms: An Analysis of Household Finance Using Integrated Household Surveys and Corporate Financial Accounting," by Krislert Samphantharak and Robert M. Townsend, is an Econometric Society monograph published by Cambridge University Press. view more
Credit: Cambridge University Press
Economists Krislert Samphantharak of UC San Diego and Robert M. Townsend of MIT have defined a far-reaching framework that may contribute significantly to the meaningful assessment and analysis of the financial lives of the world's poor.
The lack of a cohesive framework for gathering and organizing data about the finances of poor households often results in data that are inconsistent or analysis that does not make sense. This inhibits the ability of researchers and policymakers to make sound decisions that truly benefit the poor.
In their book Households as Corporate Firms, published by Cambridge University Press, Samphantharak and Townsend establish a framework that shows how researchers can create detailed accounts for households based on corporate financial accounting principles.
The implications of this work are significant. For the first time, researchers have a logical, precise tool for establishing accounts from household surveys and for collecting data in a systematic way. By basing the accounts and surveys on the already widely accepted standards of corporate financial accounting, the data collected have greater accuracy and allow for unprecedented comparisons across households and regions. The household accounts are, by definition, reconcilable. That is, there are natural cross-checks across flows in the income statement and stocks in the balance sheet, for example, and for cash transactions as in double-entry bookkeeping.
Another significant aspect of this new approach is that corporate financial accounts also serve as the foundation of national income and product accounts. Such household financial accounts could be used to accurately estimate the contributions of small household businesses to a country's gross domestic product in much the same way that larger incorporated businesses are.
"Small household enterprises can have a larger impact on overall economic growth that we may imagine," Townsend states. "The creation of these accounts helps us understand how the household sector links to the macroeconomy more generally. The accounts can also guide the provision of financial services for the poor."
The authors' work recognizes the ironic similarity that poor households in developing countries often share with corporate firms as their family business (production), acquisition of productive assets (investments), and consumption (dividends), are largely inseparable.
In other words, small enterprises such as family farms often produce food that is grown in part for their own use. This can be seen as akin to the way firms pay dividends to shareholders. Households also may invest part of any profits they earn back in their business, just as firms invest retained earnings.
Jonathan Morduch, of New York University and author of Portfolios of the Poor, recognized the potential impact of this approach. "The analytical structures will allow economists to collect better data, ask sharper questions, and bring into focus important parts of the economic lives of billions of people."
This new framework unlocks the potential for researchers and other stakeholders to use modern financial models and to analyze households in developing countries with data based on standard accounting practices.
As John Y. Campbell of Harvard University states, "The authors blaze a trail that many others will follow."