The role of liquidity in preventing dis-investment in crop inputs: Evidence from Zambia

Despite the current focus on asset smoothing, very few studies consider how seasonal crop input decisions are affected by income shocks. If households cope with 'bad' harvests by cutting back on production inputs in the following seasons, they are likely to be slowing down their economic recovery. If such shocks increase in frequency, the ability to recover quickly becomes critical. This study posits that access to liquidity sources plays a role in determining a household's investments in crop inputs following low-harvest years. Using nationally representative, household-level panel survey data from rural Zambia, we test for differential effects - by household liquidity level - of rainfall shocks on input investments in own-farm production. We estimate semi-elasticities, with respect to these shocks, of four maize inputs: basal fertilizer, top dressing fertilizer, improved maize seed and area planted to maize. Crucially, we allow the magnitude of these input adjustments to differ by household liquidity indicators, as measured by chickens, small livestock (sheep, goats, pigs), cattle, offfarm income and access to fertilizer subsidies. Our findings suggest that rainfall shocks negatively affect the use of some maize inputs. Importantly, households with cattle and access to the national fertilizer subsidy program show significantly smaller reductions in the use of mineral fertilizer. Curiously, we also observe that households with poultry and small livestock reduce their fertilizer use even more than those without.