Consumption smoothing in island economies: Can public insurance reduce welfare?

In this paper we study the effects of certain types of public compulsory in surance arrangements for aggregate shocks on private allocations in environ ments with limited commitment. We show that this type of insurance can impr ove the wellbeing of private situations, but it can also deteriorate it. We also describe how different characteristics of the environment affect the role of public insurance. Using data on the Mexican PROGRESA program, we do cument the impact that some government programs have in crowding out privat e transfers. (C) 2000 Elsevier Science B.V. All rights reserved. JEL classi fication: E60; H30; D83.