Revealed Preference and Self-Insurance : Can We Learn from the Self-Employed in Chile?
Financial sector development is a critical area of effective social protection policy. A well-regulated financial sector can complement government efforts to keep households from falling into poverty - by supplying the instruments needed to pool ri...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2013
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2002/01/1689472/revealed-preference-self-insurance-can-learn-self-employed-chile http://hdl.handle.net/10986/15756 |
| Summary: | Financial sector development is a
critical area of effective social protection policy. A
well-regulated financial sector can complement government
efforts to keep households from falling into poverty - by
supplying the instruments needed to pool risks, or to
self-insure against losses because of the death, or
disability of a household member, unexpected loss of
employment, or inability to work in old age. But many of the
policy recommendations that can be drawn from the social
risk management framework, rest on the strong assumption
that risk, and time preferences are uniform across
individuals, or households. Policies meant to encourage
participation in public pension systems, and to reduce
evasion where such systems are mandatory (by more closely
aligning benefits with payroll contributions, or introducing
individual retirement accounts) implicitly attempt to
emulate the savings behavior of individuals, and households
faced with fully functioning capital markets, and perfect
information. If no allowance is made for variation in
preferences, however, the welfare effects of policy reforms
will vary across the target population. Mandated social
security, even if actuarially fair for most, is likely to
impose welfare losses on those less inclined to save, and
insure. That said, a clearer picture of individual and
household preferences, and how they vary across the
population, can help governments design social security
systems that complement private savings, and insurance
instruments. The authors present the results of a field
experiment, designed to produce an empirical measure of risk
aversion, and time preferences of selected groups in Chile,
which in 1981 pioneered social security reform with a
transition to individual retirement accounts. The experiment
was designed primarily to establish whether the time, and
risk preferences of the self-employed differ significantly
from those of wage, and salaried workers. They find no
significant differences in mean risk, and time preferences
between the self-employed, and employees, or between the
contributing, and non-contributing employees. But they find
significant differences in these preferences between the
contributing, and non-contributing self-employed. Among the
self-employed, those who are more patient choose to
contribute to the pension system. However, the contributing
self-employed are significantly more tolerant of risk than
the non-contributing self-employed, a finding that conflicts
with the assumption that the formal pension system is the
only source of insurance against poverty in old age. The
Chilean pension system may be viewed with some trepidation
by its pool of potential clients. Since risk aversion
declines with education, the participation of the
economically active who are free to choose, could be
enhanced by a campaign carefully designed to raise
awareness, allay fears, and inform people of the benefits of
saving for retirement in the formal pension system. |
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