Income Risk, Coping Strategies and Safety Nets

The paper presents opportunities available to households in risk management and risk-coping strategies, delving into the constraints on their effectiveness. It states that despite these strategies, vulnerability remains high, and is reflected in fluctuations in consumption. The paper also focuses on income-based strategies, assets as self-insurance, and informal insurance arrangements. Providing reasons, it argues that households are constrained in using these strategies. It discusses self-insurance via savings, using Deaton's model, which provides a useful description of the advantages. The paper quantifies the consequences of holding risky assets that are covariate with incomes, using simulations and argues that in assets are risky, not safe. In conclusion, the paper:

• States that informal credit and insurance, however incomplete, help to cope with risky incomes;
• Explores the possibilities to inform policy by monitoring vulnerability and consumption-risk reducing strategies;
• Suggests that economic policies could contribute to better protection against risk, and initiatives to develop safety nets should take into account existing risk-coping strategies.