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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
Note: PE
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  1. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March.
  2. Martin Browning & Thomas Crossley, 1996. "Unemployment Insurance Benefit Levels and Consumption Changes," Department of Economics Working Papers 1996-01, McMaster University.
  3. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
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  8. 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).
  9. 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.
  10. Jonathan Gruber, 1994. "The Consumption Smoothing Benefits of Unemployment Insurance," NBER Working Papers 4750, National Bureau of Economic Research, Inc.
  11. Elizabeth Frankenberg & Duncan Thomas & Kathleen Beegle, 1999. "The Real Costs of Indonesian Economic Crisis: Preliminary Findings from the Indonesia Family Life Surveys," Working Papers 99-04, RAND Corporation Publications Department.
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  13. 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.
  14. Paul Gertler & Jonathan Gruber, 1997. "Insuring Consumption Against Illness," NBER Working Papers 6035, National Bureau of Economic Research, Inc.
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  16. 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.
  17. 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.
  18. 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.
  19. Daron Acemoglu & Robert Shimer, 1999. "Efficient Unemployment Insurance," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 893-928, October.
  20. 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.
  21. 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.
  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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