A THEORETICAL DISCUSSION OF THE ECONOMIC EFFECTS OF BUFFER STOCKS AND BUFFER FUNDS

It has been established that the absence of risk markets justifies market intervention in principle. The form of intervention that has been discussed most widely in the literature is the buffer stock. This paper points out that other forms of intervention, specifically buffer funds, are likely to perform better. The analysis shows that buffer funds are likely to outperform buffer stocks because they address market failure more directly. A sub‐theme developed in this paper is that since buffer funds are enforced saving, it follows that policies that address capital market failure are likely to dominate buffer funds and buffer stocks in welfare terms.