Income Volatility, Risk-Coping Behavior and Consumption Smoothing Mechanisms in Developing Countries: A Survey

Abstract

This paper provides a review of the general concepts and influential findings of empirical research on risk-coping behavior and consumption smoothing arrangements in rural economies of developing countries. Low-income individuals live with high levels of risk and limited access to formal financial systems for credit and insurance. In general, the evidence indicates that their informal mechanisms to mitigate risk play an important role in partially protecting their consumption. However, these alternatives do not allow rural households to achieve an optimal allocation of risk across time and income cycles and are costly on equity grounds. In addition, risks that remain uninsured seem to have adverse long term welfare consequences. Public interventions can play a significant role in improving the income security of rural households. In doing so, it is crucial to have a good understanding of the causes and not simply the symptoms of informal risk-coping behavior and its social welfare implications

Keywords: risk-coping behavior, consumption-smoothing arrangements, income volatility, informal insurance, developing countries

JEL Classification: O120, O150, O160, O170