Transitory Income and Consumption Behaviour: Evidence from Hydroelectric Infrastructure Investment

Abstract

Infrastructure investment is widely regarded as a driver of economic development, yet its welfare consequences at the household level remain underexplored, particularly in hydropower-affected regions. This study examines how the Kiru and Kwar hydroelectric projects in Block Nagseni, District Kishtwar, have influenced household income, consumption, and savings, using primary survey data from 161 project-affected households. Employing a three-stage analytical framework, the study first documents the distribution of households across categories of income, consumption, and savings change; second, computes household-level Marginal Propensity to Consume (MPC); and third, applies an interaction regression grounded in Friedman's Permanent Income Hypothesis to test whether the marginal propensity to consume differs between households that received one-time land compensation and those that did not, treating compensation as a proxy for transitory income. Results show that most households experienced positive income and consumption gains, with an average MPC of 0.607. Regression estimates reveal a significantly lower MPC among compensation recipients (0.331) than non-recipients (0.566), indicating that the consumption response to income differs systematically between the two groups and supporting the hypothesis that transitory income is consumed less readily than regular income. These findings suggest that recurring employment-based income, rather than one-time compensation, is the more effective channel through which infrastructure investment translates into sustained improvements in household welfare, offering guidance for how compensation and employment policies accompanying large infrastructure projects might be designed.