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Do the Poor Insure? A Synthesis of the Literature on Risk and Consumption in Developing Countries

In: Economics in a Changing World

Author

Listed:
  • Harold Alderman

    (The World Bank)

  • Christina H. Paxson

    (Princeton University)

Abstract

Income risk is a central feature of rural areas of developing countries. A major topic in development economics is how well households are able to mitigate the adverse effects of income risk. There are several sensible reasons why households will not be able to fully insure consumption against income fluctuations. The well-known problems of moral hazard, information asymmetries, and deficiencies in the ability to enforce contracts may result in incomplete or absent insurance markets. The dearth of formal insurance markets in developing countries is evidence that these problems are considerable. However, a large body of literature indicates that households in developing countries make use of a wide variety of mechanisms, often informal, to at least partially limit consumption risk. A key piece of information required to guide policy design is how, and how well, different households mitigate risk. This paper reviews various strategies for insuring consumption against income fluctuations, and examines evidence on how effectively these strategies work.

Suggested Citation

  • Harold Alderman & Christina H. Paxson, 1994. "Do the Poor Insure? A Synthesis of the Literature on Risk and Consumption in Developing Countries," International Economic Association Series, in: Edmar L. Bacha (ed.), Economics in a Changing World, chapter 3, pages 48-78, Palgrave Macmillan.
  • Handle: RePEc:pal:intecp:978-1-349-23458-5_3
    DOI: 10.1007/978-1-349-23458-5_3
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