Parte I.
Do the Poor Insure? A Synthesis of the Literature on Risk and Consumption in Developing Countries by Harold Alderman and Christina H. Paxson. In Economics in a Changing World Edited by Edmar L. Bacha
Income risk is a central feature of rural areas of developing countries. A major topic in development economics is how well households are able to mitigate the adverse effects of income risk. There are several sensible reasons why households will not be able to fully insure consumption against income fluctuations. The well-known problems of moral hazard, information asymmetries, and deficiencies in the ability to enforce contracts may result in incomplete or absent insurance markets. The dearth of formal insurance markets in developing countries is evidence that these problems are considerable. However, a large body of literature indicates that households in developing countries make use of a wide variety of mechanisms, often informal, to at least partially limit consumption risk. A key piece of information required to guide policy design is how, and how well, different households mitigate risk. This paper reviews various strategies for insuring consumption against income fluctuations, and examines evidence on how effectively these strategies work.
There is a wide range of possible strategies to mitigate risk. We offer two broad classifications for consideration:
Risk management. In the absence of perfect insurance markets, households may undertake actions to reduce the variability of income. Within agriculture this might include crop and field diversification. Households might also limit income risk by choosing a diverse portfolio of occupations, or through the strategic migration of family members. The optimal amount of diversification will depend on the household's preferences towards risk, its ability to smooth consumption against income fluctuations, and the costs of diversification in the form of reduced average incomes.
Risk coping. Risk-coping strategies can be classified as those that smooth consumption intertemporally, through saving behaviour, and those that smooth consumption across households, through risk-sharing. The primary distinction between these two is that intertemporal smooothing enables a household to spread the effects of income shocks on consumption forward through time. Risk-sharing, by contrast, spreads the effects of income shocks across households at any one point in time. A wide variety of mechanisms may be used for both intertemporal consumption smoothing and risk-sharing. Intertemporal smoothing may be accomplished through borrowing and lending in formal or informal markets, accumulating and selling assets, and storing goods for future consumption. Risk-sharing arrangements may be accomplished through formal institutions, such a insurance and futures markets, and forward contracts for harvests, and informal mechanisms, including state-contingent transfers and remittances between friends and neighbours. These are also a number of institutions that may offer 'disguised' insurance. For example, share tenancy, credit contracts with state-contingent repayments, and long-term labour contracts may each contain an insurance component, although none are explicitly insurance contracts.
The authors claim that the relative lack of formal insurance markets in developing countries is caused, among others by:
Item 3 - feeble government institutions.
