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Journal of Economic Perspectives: Vol. 9 No. 3 (Summer 1995)

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Income Smoothing and Consumption Smoothing

Article Citation

Morduch, Jonathan. 1995. "Income Smoothing and Consumption Smoothing." Journal of Economic Perspectives, 9(3): 103-114.

DOI: 10.1257/jep.9.3.103

Abstract

One way that risk-averse households protect consumption levels is to borrow and use insurance mechanisms. Another way, common in low-income economies, is to diversify economic activities and make conservative production and employment choices. Households thus tend toward limiting exposure only to shocks that can be handled with available credit and insurance. Typically, both types of mechanisms are studied independently but much more can be learned by studying them together. First, we obtain a more complete picture of risks, costs, and insurance possibilities. Second, it opens the way to considering biases in standard tests of credit and insurance.

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Authors

Morduch, Jonathan (Harvard U)

JEL Classifications

O12: Microeconomic Analyses of Economic Development

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