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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

  • Raj Chetty
  • Adam Looney

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, May.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 0374.
    Handle: RePEc:nbr:nberch:0374
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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    1. Browning, Martin & Crossley, Thomas F., 2001. "Unemployment insurance benefit levels and consumption changes," Journal of Public Economics, Elsevier, vol. 80(1), pages 1-23, April.
    2. Dercon, Stefan, 2002. "Income Risk, Coping Strategies and Safety Nets," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
    3. Robert Holzmann & Steen Jørgensen, 2001. "Social Risk Management: A New Conceptual Framework for Social Protection, and Beyond," International Tax and Public Finance, Springer, vol. 8(4), pages 529-556, August.
    4. 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.
    5. Krueger, Alan B. & Meyer, Bruce D., 2002. "Labor supply effects of social insurance," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 33, pages 2327-2392 Elsevier.
    6. Acemoglu, D. & Shimer, R., 1997. "Efficient Unemployment Insurance," Working papers 97-9, Massachusetts Institute of Technology (MIT), Department of Economics.
    7. Frankenberg, E. & Thomas, D. & Beegle, K., 1999. "The Real Costs of Indonesia's Economic Crisis: Preliminary Findings from the Indonesia Family Life Surveys," Papers 99-04, RAND - Labor and Population Program.
    8. 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.
    9. Jonathan Morduch, 1995. "Income Smoothing and Consumption Smoothing," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 103-114, Summer.
    10. Duncan Thomas & Kathleen Beegle & Elizabeth Frankenberg, 2000. "Labor Market Transitions of Men and Women During an Economic Crisis: Evidence from Indonesia," Working Papers 00-11, RAND Corporation Publications Department.
    11. 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.
    12. Paul Gertler & David I. Levine & Enrico Moretti, 2003. "Do Microfinance Programs Help Families Insure Consumption Against Illness?," Development and Comp Systems 0303004, EconWPA.
    13. Elizabeth Frankenberg & James P. Smith & Duncan Thomas, 2004. "Economic Shocks, Wealth and Welfare," Labor and Demography 0403030, EconWPA.
    14. Paul Gertler & Jonathan Gruber, 2002. "Insuring Consumption Against Illness," American Economic Review, American Economic Association, vol. 92(1), pages 51-70, March.
    15. 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.
    16. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March.
    17. Jonathan Gruber, 1994. "The Consumption Smoothing Benefits of Unemployment Insurance," NBER Working Papers 4750, National Bureau of Economic Research, Inc.
    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. 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.
    20. 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.
    21. Townsend, R.M., 1991. "Risk and Insurance in Village India," University of Chicago - Economics Research Center 91-3, Chicago - Economics Research Center.
    22. 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.
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