Consumption Insurance: An Evaluation of Risk-Bearing Systems in Low-Income Economies

TLDR

High idiosyncratic risks in many low‑income settings make credit and insurance arrangements potentially beneficial. The study tests whether full risk‑sharing mechanisms operate in low‑income countries by evaluating formal and informal financial systems. The authors describe consumption‑smoothing devices empirically and analyze private‑information incentives theoretically to identify ideal operating systems. Statistical tests show that households in southern India exploit risk‑sharing mechanisms, whereas villages in Côte d’Ivoire and Thailand perform poorly, and the full‑information framework offers policy benchmarks.

Abstract

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.