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

   (375 K)

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 inefficient

smoothing methods.

Published:

• Ito, T. and A. Rose. Fiscal Policy and Management in East Asia: NBER East Asia Seminar on Economics 16. Chicago: University of Chicago Press, 2007. ,
• Income Risk and the Benefits of Social Insurance: Evidence from Indonesia and the United States, Raj Chetty, Adam Looney, in Fiscal Policy and Management in East Asia, NBER-EASE, Volume 16 (2007), University of Chicago Press
  

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This paper was revised on September 6, 2006

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