Risk is part of life in developing countries. Despite generally imperfect credit and lacking insurance markets, households use a variety of strategies to manage and cope with risk, including savings and informal credit transactions, mutual support networks, and income and asset diversification. Most evidence suggests that these strategies achieve only partial consumption smoothing and risk-sharing, while they are not without long-term costs in terms of investment and poverty. This article discusses the nature and evidence on the typical strategies used, and explores its implications. It also highlights some outstanding questions.
KeywordsAsymmetric information Buffer stocks Credit markets in developing countries Health insurance Household portfolios Income diversification Income shocks Income smoothing Insurance markets Intertemporal consumption smoothing Labour supply Micro-insurance Optimal portfolio mix Precautionary savings Risk Risk aversion Risk coping strategies Risk diversification Risk sharing Risk-sharing contracts Risk-sharing networks Self-insurance
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