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

Raj Chetty () and W. Adam Looney

No 11709, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: H0 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dev, nep-ias and nep-pbe
Date: 2005-10
Note: PE
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Journal Article: Consumption smoothing and the welfare consequences of social insurance in developing economies (2006)
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