Insurance I How the Poor Deal with Risk 🔹 Slide Title: Savings for a rainy (or dry...) day: Introducing uncertainty We’re introduced to a simple intertemporal choice model under uncertainty — a foundation for understanding how poor households deal with risk through savings (before getting into insurance or borrowing). ✅ The Scenario: A farmer earns income in two periods: Period 1 income (y₁) is known. Period 2 income (y₂) is uncertain — it can be either: High income (yᴴ) with probability p Low income (yᴸ) with probability 1 - p 🎯 Objective: The farmer wants to maximize total expected utility over the two periods. The utility function is: max u ( c 1 ) + β E [ u ( c 2 ) ] \max u(c_1) + \beta \mathbb{E}[u(c_2)] c 1 c_1 : consumption in period 1 c 2 c_2 : consumption in period 2 β \beta : discount factor (how much they value future consumption relative to today) 🔁 Budget Constraints: They can save or borrow : S S : savings in period 1 (could...