Health shocks, consumption fluctuations, and optimal insurance (VOXEU)

As populations age in many countries, the risks associated with health shocks become increasingly important. Health shocks can affect consumption by changing a household’s available resources and/or the marginal utilities of different goods. This column quantifies the response of consumption to health shocks and uses a structural model to disentangle the two mechanisms above. It shows that temporary changes in health are associated with significant changes in non-durable consumption, with stronger effects in low-wealth households. In addition, the marginal utility channel is significantly stronger in explaining these effects than through households’ resources.

https://voxeu.org/article/health-shocks-consumption-fluctuations-and-optimal-insurance

Richard Blundell, Margherita Borella, Jeanne Commault, Mariacristina De Nardi

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