# **1 Introduction**

Households often accumulate wealth as a self-insurance mechanism against future shocks.1 In the absence of complete markets, households build up a buffer of wealth to smooth consumption over the lifetime (Deaton, 1991). While a vast literature has analyzed the implications of the precautionary motive in different settings, including many that have focused on developing economies, not much is known about the precautionary behavior in economies trapped in fragility, conflict, and violence (FCV).2 This gap in research is unfortunate as the volatile situation in FCV economies arguably makes the precautionary motive much stronger. If true, welfare costs associated with precautionary behavior are likely to be much higher under such conditions.3 However, an analysis of precautionary behavior requires deep household-level data which are difficult to collect in such economies. In this paper, we use data from a detailed household survey from Afghanistan to shed light on the precautionary behavior of households in a country where a range of factors packed under the broad umbrella of FCV has created an environment of utmost uncertainty.

There are two principal components to our analysis. First, we want to ascertain whether the precautionary motive is a significant driver of wealth accumulation in Afghanistan and second, whether the presence of conflict affects the nature of wealth accumulation behavior of households. To make progress with these tasks, we analyze the relationship between household wealth and income uncertainty faced by households (Guiso _et al._ (1992), Carroll & Samwick (1997), Carroll & Samwick (1998) etc.). Critical to our analysis, the survey we use was designed with a special focus to include important sources of household wealth. It contains information on households<sup>′</sup> ownership of gold and silver together with livestock holding which we use to construct our measure of wealth. The inclusion of these asset-types is essential as it has been well-documented that jewelry and livestock form a vital share of household wealth in poor economies.4 These assets can be particularly handy in protecting against future shocks. On the one hand, the lack of financial access creates barriers to accumulating wealth using financial assets, but it is also likely that households consider jewelry and livestock to be a better store of value than cash and other financial

> 1 See Marshall (1920) and Keynes (1936) for the foundations of the theory.

> 2 In a large cross-country study consisting of both industrial and developing countries, Loayza _et al._ (2000) found widespread evidence of the precautionary savings motive.

> 3To be clear, self-insurance via precautionary wealth accumulation is still preferable to a no insurance scenario. In fact, they can be more effective than other insurance instruments in combating mild idiosyncratic shocks. However, there are both private and social losses when precautionary wealth is used to protect against large idiosyncratic risks or systemic risks. For a detailed discussion, see the 2014 World Development Report (World Bank, 2014).

> 4Studies going back to Jodha (1978), Watts (1983), Binswanger & McIntire (1987), Swinton (1988) etc. highlight the importance of livestock sales in smoothing shocks. Precious metals like gold and silver are used less frequently but is an important component of household wealth (Fafchamps _et al._ , 1998).

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