Income Volatility, Risk-Coping Behavior and Consumption Smoothing Mechanisms in Developing Countries: A Survey
No. 58 (2006-08-01)Author(s)
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Baez Javier Eduardo*Graduate Student, Department of Economics and Graduate Associate at the Center for Policy Research, Maxwell School of Citizenship and Public Affairs, Syracuse University, Syracuse, New York, USA. I wish to thank Mark Rosenzweig, Dani Rodrik and Robert T. Jensen for thought provoking discussions that increased my interest and awareness of these issues. I also thank Gary Engelhardt, Jesse Bricker, Katie Fitzpatrick and two anonymous referees for very helpful comments. Correspondence can be sent to: Center for Policy Research, 426 Eggers Hall, Syracuse University, Syracuse, NY New York 13244 USA. Email: jebaez@maxwell.syr.edu.
Abstract
This paper provides a review of the general concepts and influential findings of empirical research on risk-coping behavior and consumption smoothing arrangements in rural economies of developing countries. Low-income individuals live with high levels of risk and limited access to formal fi nancial systems for credit and insurance. In general, the evidence indicates that their informal mechanisms to mitigate risk play an important role in partially protecting their consumption. However, these alternatives do not allow rural households to achieve an optimal allocation of risk across time and income cycles and are costly on equity grounds. In addition, risks that remain uninsured seem to have adverse long term welfare consequences. Public interventions can play a signifi cant role in improving the income security of rural households. In doing so, it is crucial to have a good understanding of the causes and not simply the symptoms of informal risk-coping behavior and its social welfare implications.