Journal of Economic Perspectives: Vol. 9 No. 3 (Summer 1995)
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Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies
Townsend, Robert M. 1995. "Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies." Journal of Economic Perspectives, 9(3): 83-102.
The hypothesis of full risk sharing can be taken to data from low-income countries and evaluate formal and informal financial systems. In many contexts, idiosyncratic risks are high, so credit/insurance arrangements could be beneficial. Statistical tests reveal that households in southern India take advantage of these possibilities; villages in Cote d'Ivoire and countries in Thailand do not do as well. The paper includes an empirical description of the devices used to smooth consumption and a theoretical discussion of private information and incentives on ideal operating systems. The full information and mechanism design frameworks provide benchmarks for policy analysis.
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Townsend, Robert M. (U Chicago)
O12: Microeconomic Analyses of Economic Development
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