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Income Risk, Coping Strategies and Safety Nets

  • Dercon, Stefan

Rural and urban households in developing countries face substantial idiosyncratic and common risk, resulting in high income variability. Households in risky environments have developed sophisticated (ex-ante) risk-management and (ex-post) risk-coping strategies, including self-insurance via savings and informal insurance mechanisms to do so while formal credit and insurance markets appear to contribute only little to reducing income risk and its consequences. Informal credit and insurance, however incomplete, helps to cope with risky incomes. Despite these strategies, vulnerability remains high, and is reflected in fluctuations in consumption. It is clear therefore, that further development of safety nets will be necessary. In this paper, we focus on the opportunities available to households to use risk-management and risk-coping strategies, and on the constraints on their effectiveness.

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Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Paper Series with number UNU-WIDER Research Paper DP2002/22.

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Length: 27 pages
Date of creation: 2002
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Handle: RePEc:unu:wpaper:dp2002-22
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