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© 1999 International Bank for Reconstruction and Development / The World Bank

research-article

Between the State and the Market: Can Informal Insurance Patch the Safety Net?

Jonathan Morduch

Jonathan Morduch is a MacArthur Foundation Research Fellow at Princeton University. The author is grateful for comments from Harold Alderman, Angus Deaton, and the journal's referees. He has also benefited from discussions with Marcel Fafchamps, Trina Haque, John Hoddinott, Emmanuel Jimenez, Helena Ribe, and participants in a seminar at the World Bank in July 1997. This work was supported by the Africa Department of the World Bank. The first draft was completed while a National Fellow at the Hoover Institution, Stanford University, and the revision was completed with support from the John D. and Catherine T. MacArthur Foundation.

Most households in low-income countries deal with economic hardships through informal insurance arrangements between individuals and communities rather than through publicly managed programs or market-provided insurance schemes. Households may, for example, draw on savings, sell physical assets, rely on reciprocal gift exchanges, or diversify into alternative income-generating activities. These mechanisms can be highly effective in the right circumstances, but most recent studies show that informal insurance arrangements are often weak. Poor households, in particular, have substantial difficulties coping with even local, idiosyncratic risks. Public policy can help reduce vulnerability by encouraging private, flexible coping mechanisms while discouraging those that are fragile or that hinder economic and social mobility. Promising policies include creating self-regulating workfare programs and providing a supportive setting for institutions working to improve access to credit, crop and health insurance, and safe and convenient saving opportunities.


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