Variations in farm consumption and their relationship to income: an empirical investigation of Illinois farm households

Empirical tests of household consumption have yielded mixed results regarding the validity of the life cycle/permanent income (LCPI) hypothesis. A significant problem with such studies is the difficulty in finding sufficient micro-level data on household expenditures. By using the recent rich quantity of such data in the Farm Business Farm Management (FBFM) data for Illinois farms from 1995 to 2009, the study reported here for farm households should provide more consistent results regarding the LCPI hypothesis. Applying an empirical model based on the LCPI hypothesis, this article identifies the determinants of farm consumption and the relationship to income. This study provides evidence that current income changes are not significant in explaining the consumption changes of farm households, thus supporting the LCPI hypothesis for farm households.