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Consumption Smoothing and the Welfare Consequences of Social Insurance in Developing Economies

  • Raj Chetty
  • Adam Looney

Studies of risk in developing economies have focused on consumption fluctuations as a measure of the value of insurance. A common view in the literature is that the welfare costs of risk and benefits of social insurance are small if income shocks do not cause large consumption fluctuations. We present a simple model showing that this conclusion is incorrect if the consumption path is smooth because individuals are highly risk averse. Empirical studies find that many households in developing countries rely on inefficient methods to smooth consumption, suggesting that they are indeed quite risk averse. Hence, social safety nets may be valuable in low-income economies even when consumption is not very sensitive to shocks.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11709.

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Date of creation: Oct 2005
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:11709
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