The Cost of Incomplete Consumption Insurance against Health Shocks: Evidence from Mexico

Ana Sofia Leon, University of Chicago

I study the effect of breadwinners’ health shocks on household consumption, measuring health shocks through changes in the capacity to perform Activities of Daily Living. I find that health shocks to households’ breadwinners are associated with significant long-lasting decreases in non-medical per capita consumption, but health shocks to other household members have no such effects. When consumption depends on labor income, the economic cost associated with a health shock may lie less with direct out-of-pocket medical expenditures than with the diminished capacity to work. Therefore, providing health insurance to the previously uninsured sector of the population could potentially increase social welfare because of its consumption smoothing properties, although it would not necessarily provide full consumption insurance against health shocks. I use a standardized expected utility model to compute the risk premia households would be willing to pay to reduce, either partially or entirely, households’ risk exposure to any health shock.