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Income Risk and the Benefits of Social Insurance: Evidence from Indonesia and the United States

In: Fiscal Policy and Management in East Asia, NBER-EASE, Volume 16

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  • Raj Chetty
  • Adam Looney

Abstract

This paper examines the welfare consequences of social safety nets in developing economies relative to developed economies. Using panel surveys of households in Indonesia and the United States, we find that food consumption falls by approximately ten percent when individuals become unemployed in both countries. This finding suggests that introducing a formal social insurance program would have small benefits in terms of reducing consumption fluctuations in Indonesia. However, in contrast with households in the U.S., Indonesians use costly methods such as reducing human capital investment to smooth consumption. The primary benefit of social insurance in developing countries may therefore come not from consumption smoothing itself but from reducing the use of inefficient smoothing methods.

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This chapter was published in:

  • Takatoshi Ito & Andrew K. Rose, 2007. "Fiscal Policy and Management in East Asia, NBER-EASE, Volume 16," NBER Books, National Bureau of Economic Research, Inc, number ito_07-1, octubre-d.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 0374.

    Handle: RePEc:nbr:nberch:0374

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    1. Paul Gertler & David I. Levine & Enrico Moretti, 2009. "Do microfinance programs help families insure consumption against illness?," Health Economics, John Wiley & Sons, Ltd., vol. 18(3), pages 257-273.
    2. Thomas, D. & Beegle, K. & Frankenberg, E., 2000. "Labor Market Transitions of Men and Women During an Economic Crisis: Evidence from Indonesia," Papers 00-11, RAND - Labor and Population Program.
    3. Martin Browning & Thomas Crossley, 1996. "Unemployment Insurance Benefit Levels and Consumption Changes," Department of Economics Working Papers 1996-01, McMaster University.
    4. Morduch, J., 1995. "Income Smoothing and Consumption Smoothing," Papers 512, Harvard - Institute for International Development.
    5. Robert Holzmann & Steen Jorgensen, 2000. "Social risk management : a new conceptual framework for social protection and beyond," Social Protection Discussion Papers 21314, The World Bank.
    6. Stefan Dercon, 2000. "Income risk, coping strategies and safety nets," CSAE Working Paper Series 2000-26, Centre for the Study of African Economies, University of Oxford.
    7. Stephen Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 24-85, Wharton School Rodney L. White Center for Financial Research.
    8. Susan Dynarski & Jonathan Gruber, 1997. "Can Families Smooth Variable Earnings?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 229-303.
    9. Alan B. Krueger & Bruce D. Meyer, 2002. "Labor Supply Effects of Social Insurance," NBER Working Papers 9014, National Bureau of Economic Research, Inc.
    10. Paul Gertler & Jonathan Gruber, 1998. "Insuring Consumption Against Illness," JCPR Working Papers 41, Northwestern University/University of Chicago Joint Center for Poverty Research.
    11. Elizabeth Frankenberg & James P. Smith & Duncan Thomas, 2003. "Economic Shocks, Wealth, and Welfare," Journal of Human Resources, University of Wisconsin Press, vol. 38(2).
    12. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
    13. Chetty, Raj & Looney, Adam, 2006. "Consumption smoothing and the welfare consequences of social insurance in developing economies," Journal of Public Economics, Elsevier, vol. 90(12), pages 2351-2356, December.
    14. Elizabeth Frankenberg & Duncan Thomas & Kathleen Beegle, 1999. "The Real Costs of Indonesian Economic Crisis: Preliminary Findings from the Indonesia Family Life Surveys," Working Papers 99-04, RAND Corporation Publications Department.
    15. Jonathan Gruber, 1994. "The Consumption Smoothing Benefits of Unemployment Insurance," NBER Working Papers 4750, National Bureau of Economic Research, Inc.
    16. Roger Gordon & Wei Li, 2005. "Tax Structure in Developing Countries: Many Puzzles and a Possible Explanation," NBER Working Papers 11267, National Bureau of Economic Research, Inc.
    17. Townsend, R.M., 1991. "Risk and Insurance in Village India," University of Chicago - Economics Research Center 91-3, Chicago - Economics Research Center.
    18. Thomas, Duncan & Beegle, Kathleen & Frankenberg, Elizabeth & Sikoki, Bondan & Strauss, John & Teruel, Graciela, 2004. "Education in a crisis," Journal of Development Economics, Elsevier, vol. 74(1), pages 53-85, June.
    19. Lisa A. Cameron & Christopher Worswick, 2003. "The Labor Market as a Smoothing Device: Labor Supply Responses to Crop Loss," Review of Development Economics, Wiley Blackwell, vol. 7(2), pages 327-341, 05.
    20. Cochrane, John H, 1991. "A Simple Test of Consumption Insurance," Journal of Political Economy, University of Chicago Press, vol. 99(5), pages 957-76, October.
    21. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March.
    22. Cullen, Julie Berry & Gruber, Jonathan, 2000. "Does Unemployment Insurance Crowd Out Spousal Labor Supply?," Journal of Labor Economics, University of Chicago Press, vol. 18(3), pages 546-72, July.
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    Cited by:
    1. Pande, Rohini, 2008. "Understanding Political Corruption in Low Income Countries," Handbook of Development Economics, Elsevier.
    2. Mathias Trabandt & Karl Walentin & Lawrence J. Christiano, 2010. "Involuntary Unemployment and the Business Cycle," 2010 Meeting Papers 129, Society for Economic Dynamics.
    3. Carlos Medina & Jairo Núñez & Jorge Andrés Tamayo, 2013. "The Unemployment Subsidy Program in Colombia: An Assessment," BORRADORES DE ECONOMIA 010393, BANCO DE LA REPÚBLICA.
    4. Lawrence J. Christiano, 2011. "Comment on "Unemployment in an Estimated New Keynesian Model"," NBER Chapters, in: NBER Macroeconomics Annual 2011, Volume 26, pages 361-380 National Bureau of Economic Research, Inc.
    5. Lawrence J. Christiano & Mathias Trabandt & Karl Walentin, 2010. "DSGE models for monetary policy analysis," CQER Working Paper 2010-02, Federal Reserve Bank of Atlanta.
    6. Iwamoto, Yasushi & Kohara, Miki & Saito, Makoto, 2010. "On the consumption insurance effects of long-term care insurance in Japan: Evidence from micro-level household data," Journal of the Japanese and International Economies, Elsevier, vol. 24(1), pages 99-115, March.
    7. Jungho Kim & Alexia Prskawetz, 2010. "External Shocks, Household Consumption and Fertility in Indonesia," Population Research and Policy Review, Springer, vol. 29(4), pages 503-526, August.
    8. Bruno Rocha, 2010. "At Different Speeds: Policy Complementarities and the Recovery from the Asian Crisis," Working Papers id:3294, eSocialSciences.
    9. Chetty, Raj & Looney, Adam, 2006. "Consumption smoothing and the welfare consequences of social insurance in developing economies," Journal of Public Economics, Elsevier, vol. 90(12), pages 2351-2356, December.
    10. World Bank, 2006. "Making the New Indonesia Work for the Poor," World Bank Other Operational Studies 8172, The World Bank.

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