Income Risk, Coping Strategies, and Safety Nets |
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Authors: | Dercon Stefan |
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Institution: | Stefan Dercon is a fellow of economics at Jesus College and a university lecturer in economics based at the Centre for the Study of African Economies, Oxford University. |
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Abstract: |
Poor rural and urban households in developing countries facesubstantial risks, which they handle with risk-management andrisk-coping strategies, including self-insurance through savingsand informal insurance mechanisms. Despite these mechanisms,however, vulnerability to poverty linked to risk remains high.This article reviews the literature on poor households' useof risk-management and risk-coping strategies. It identifiesthe constraints on their effectiveness and discusses policyoptions. It shows that risk and lumpiness limit the opportunitiesto use assets as insurance, that entry constraints limit theusefulness of income diversification, and that informal risk-sharingprovides only limited protection, leaving some of the poor exposedto very severe negative shocks. Public safety nets are likelyto be beneficial, but their impact is sometimes limited, andthey may have negative externalities on households that arenot covered. Collecting more information on households' vulnerabilityto povertythrough both quantitative and qualitative methodscouldhelp inform policy. |
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