Working Paper: NBER ID: w11709
Authors: Raj Chetty; Adam Looney
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.
Keywords: No keywords provided
JEL Codes: H0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high risk aversion (D81) | inefficient consumption smoothing mechanisms (D15) |
| inefficient consumption smoothing mechanisms (D15) | significant welfare costs (D69) |
| high risk aversion (D81) | costly consumption smoothing behaviors (D15) |
| costly consumption smoothing behaviors (D15) | reduced children's education (I24) |
| costly consumption smoothing behaviors (D15) | lower-risk agricultural practices (Q16) |
| high risk aversion (D81) | welfare gains from social insurance (H55) |
| social insurance (H55) | alleviation of inefficient behaviors (D61) |
| alleviation of inefficient behaviors (D61) | improved welfare outcomes (I38) |