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

31 Pages Posted: 14 Sep 2006 Last revised: 30 Jun 2010

See all articles by Raj Chetty

Raj Chetty

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Adam Looney

Brookings Institution; U.S. Department of the Treasury, Office of Tax Analysis (OTA)

Date Written: October 2005

Abstract

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 inefficientsmoothing methods.

Suggested Citation

Chetty, Nadarajan (Raj) and Looney, Adam, Income Risk and the Benefits of Social Insurance: Evidence from Indonesia and the United States (October 2005). NBER Working Paper No. w11708, Available at SSRN: https://ssrn.com/abstract=837151

Nadarajan (Raj) Chetty (Contact Author)

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Adam Looney

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U.S. Department of the Treasury, Office of Tax Analysis (OTA) ( email )

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