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

17 Pages Posted: 15 Jan 2006 Last revised: 31 Jul 2014

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

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.

Suggested Citation

Chetty, Nadarajan (Raj) and Looney, Adam, Consumption Smoothing and the Welfare Consequences of Social Insurance in Developing Economies (October 2005). NBER Working Paper No. w11709, Available at SSRN: https://ssrn.com/abstract=837152

Nadarajan (Raj) Chetty (Contact Author)

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Adam Looney

Brookings Institution ( email )

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

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