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Consumption Smoothing and the Welfare Consequences of Social Insurance in Developing Economies

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Author Info
Raj Chetty
Adam Looney

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Abstract

Studies of risk in developing economies have focused on consumption fluctuations as a measure of the value of insurance. A common view in the literature is that the welfare costs of risk and benefits of social insurance are small if income shocks do not cause large consumption fluctuations. We present a simple model showing that this conclusion is incorrect if the consumption path is smooth because individuals are highly risk averse. Empirical studies find that many households in developing countries rely on inefficient methods to smooth consumption, suggesting that they are indeed quite risk averse. Hence, social safety nets may be valuable in low-income economies even when consumption is not very sensitive to shocks.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11709.

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Date of creation: Oct 2005
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Handle: RePEc:nbr:nberwo:11709

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H0 - Public Economics - - General

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  2. Rosenzweig, Mark R & Stark, Oded, 1989. "Consumption Smoothing, Migration, and Marriage: Evidence from Rural India," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 905-26, August. [Downloadable!] (restricted)
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  8. Raj Chetty & Adam Looney, 2005. "Income Risk and the Benefits of Social Insurance: Evidence from Indonesia and the United States," NBER Working Papers 11708, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Raj Chetty, 2005. "A General Formula for the Optimal Level of Social Insurance," NBER Working Papers 11386, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Raj Chetty & Adam Looney, 2005. "Income Risk and the Benefits of Social Insurance: Evidence from Indonesia and the United States," NBER Working Papers 11708, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Debdulal Mallick & Mohammad Rafi, 2008. "Are the Female Headed Households More Food Insecure? Evidence from Bangladesh," Economics Series 2008_08, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance. [Downloadable!]
  3. Robinson, Jonathan & Yeh, Ethan, 2008. "Transactional Sex as a Response to Risk in Western Kenya," MPRA Paper 7350, University Library of Munich, Germany. [Downloadable!]
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