Indirect benefits of store ownership

AAE PhD candidate Rachel Frattarola spent two years as a Peace Corps Volunteer in Panama from 2011 to 2013. It was as a Volunteer in Panama that she observed that many small shops found in rural villages were unprofitable. With this observation in mind, she started investigating the motives beyond income generation for store ownership in developing countries. Her research uses LSMS panel data from Nicaragua to test if store ownership provides a consumption benefit through lower prices via bulk discounts and if households use stores as an informal insurance mechanism.
Rachel finds that many stores are unprofitable and that stores are less profitable than other business types. However, there is evidence that store-owning households have higher total food consumption than households without a business or that own another type of business. This suggests that even though stores are not making profits, households may continue to operate them in order to access food at a lower cost. Another reason households might operate unprofitable stores is to provide insurance in the event of an unexpected negative income shock such as the hospitalization of a household member or livestock loss, which she is currently examining.