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Income Risk and the Benefits of Social Insurance: Evidence from Indonesia and the United States

  • 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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File URL: http://www.nber.org/papers/w11708.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11708.

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Date of creation: Oct 2005
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Publication status: published as Ito, T. and A. Rose. Fiscal Policy and Management in East Asia: NBER East Asia Seminar on Economics 16. Chicago: University of Chicago Press, 2007.
Handle: RePEc:nbr:nberwo:11708
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  1. 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.
  2. Thomas, D. & Beegle, K. & Frankenberg, E., 2000. "Labor Market Transitions of Men and Women During an Economic Crisis: Evidence from Indonesia," Papers 00-11, RAND - Labor and Population Program.
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  4. 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.
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  8. Gertler, Paul & Levine, David I. & Moretti, Enrico, 2003. "Do Microfinance Programs Help Families Insure Consumption Against Illness?," Center for International and Development Economics Research, Working Paper Series qt5811j217, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
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  13. 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.
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  17. 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.
  18. Acemoglu, D. & Shimer, R., 1997. "Efficient Unemployment Insurance," Working papers 97-9, Massachusetts Institute of Technology (MIT), Department of Economics.
  19. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March.
  20. 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.
  21. 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.
  22. 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.
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