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Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies

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  • Robert M. Townsend

Abstract

The hypothesis of full risk sharing can be taken to data from low-income countries and evaluate formal and informal financial systems. In many contexts, idiosyncratic risks are high, so credit/insurance arrangements could be beneficial. Statistical tests reveal that households in southern India take advantage of these possibilities; villages in Cote d'Ivoire and countries in Thailand do not do as well. The paper includes an empirical description of the devices used to smooth consumption and a theoretical discussion of private information and incentives on ideal operating systems. The full information and mechanism design frameworks provide benchmarks for policy analysis.

Suggested Citation

  • Robert M. Townsend, 1995. "Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 83-102, Summer.
  • Handle: RePEc:aea:jecper:v:9:y:1995:i:3:p:83-102
    Note: DOI: 10.1257/jep.9.3.83
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    References listed on IDEAS

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    JEL classification:

    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development

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