TY  - JOUR
AU  - Chetty,Raj
AU  - Looney,Adam
TI  - Consumption Smoothing and the Welfare Consequences of Social Insurance in Developing Economies
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11709
PY  - 2005
Y2  - October 2005
UR  - http://www.nber.org/papers/w11709
L1  - http://www.nber.org/papers/w11709.pdf
N1  - Author contact info:
Raj Chetty
Department of Economics
Harvard University
1805 Cambridge St.
Cambridge, MA 02138
Tel: 617-744-9492
E-Mail: chetty@fas.harvard.edu

Adam Looney
The Brookings Institution
1775 Massachusetts Ave., NW
Washington, DC 20036 
E-Mail: alooney@brookings.edu
AB  - 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.
ER  -