CCT programs for consumption insurance: evidence from Colombia

This paper presents evidence of the ability of poor households in Colombia to insure consumption against idiosyncratic and covariate risks. Using longitudinal data from Familias en Acción (FA), a conditional cash transfer program (CCT) in Colombia, we test the predictions of the Pareto full risk-sharing model and estimate the parameters of a partial insurance model. Although we reject the hypothesis of full insurance, our results suggest there is a level of risk sharing in these communities, supporting the partial insurance model. In addition, we evaluate the effectiveness of FA as a risk management mechanism for beneficiary households. We find that the program serves not only as an instrument for consumption smoothing, but also for income smoothing. Particularly, FA is effective in protecting food consumption but not nonfood consumption, and it reduces consumption fluctuations in response to idiosyncratic shocks but not to covariate shocks.