Income Smoothing and Consumption Smoothing
Journal of Economic Perspectives, 9 (3):
103-14 (Summer 1995)Abstract
One way that risk-averse households protect consumption levels is
to borrow and use insurance mechanisms. Another way, common in low-income
economies, is to diversify economic activities and make conservative
production and employment choices. Households thus tend toward limiting
exposure only to shocks that can be handled with available credit
and insurance. Typically, both types of mechanisms are studied independently
but much more can be learned by studying them together. First, we
obtain a more complete picture of risks, costs, and insurance possibilities.
Second, it opens the way to considering biases in standard tests
of credit and insurance. Copyright 1995 by American Economic Association.