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Income Smoothing and Consumption Smoothing

  • Jonathan Morduch

One way that risk-averse households protect consumption levels is to borrow and use insurance mechanisms. Another way, common in low-income economies, is to diversify economic activities and make conservative production and employment choices. Households thus tend toward limiting exposure only to shocks that can be handled with available credit and insurance. Typically, both types of mechanisms are studied independently but much more can be learned by studying them together. First, we obtain a more complete picture of risks, costs, and insurance possibilities. Second, it opens the way to considering biases in standard tests of credit and insurance.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.9.3.103
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Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 9 (1995)
Issue (Month): 3 (Summer)
Pages: 103-114

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Handle: RePEc:aea:jecper:v:9:y:1995:i:3:p:103-14
Note: DOI: 10.1257/jep.9.3.103
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  1. 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.
  2. Rosenzweig, Mark R & Binswanger, Hans P, 1993. "Wealth, Weather Risk and the Composition and Profitability of Agricultural Investments," Economic Journal, Royal Economic Society, vol. 103(416), pages 56-78, January.
  3. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct.
  4. Bardhan, Pranab K, 1983. "Labor-Tying in a Poor Agrarian Economy: A Theoretical and Empirical Analysis," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 501-14, August.
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