Digital safety nets: a roadmap

We show how new digital technologies can be used to improve safety nets for insurance against idiosyncratic and aggregate income risks, tailored to deal specifically with well-known obstacles to trade: limited commitment, moral hazard, unobserved states and payment transaction costs. We illustrate the gains from incentive-compatible voluntary risk-sharing schemes for groups of economic agents, eg Thai households and Spanish firms. We assess the currently best-fitting financial regime within each group and quantify large welfare gains from improved insurance despite the obstacles to trade. Our methods could be applied in various contexts to foster financial inclusion and complement existing broader safety net mechanisms in a cost-effective way. We provide blueprints for design and implementation.

JEL classification: G10, G52, G23, D82, D53, O16.

Keywords: digital financial platforms and contracts, safety nets, targeted transfers, risk sharing, financial inclusion, limited commitment, private information.