Consumption costs and welfare implications of incomplete insurance against health shocks: The case of Mexico

This dissertation studies the effect of health shocks on household economy measuring health shocks through changes in the capacity to perform Activities of Daily Living (ADLs) in the elderly Mexican population.;In the first chapter I find that health shocks to uninsured households' breadwinners are associated with significant long-lasting decreases in non-medical per capita consumption in the household, but health shocks to other household members have no such effects. I also find that social security coverage attenuates most of the effects of breadwinners' health shocks on household consumption, which I interpret as resulting from the fact that social security not only provides medical expenditure coverage but also disability insurance. By estimating the potential health-shocks-related costs families are exposed to, I am able to approximate the potential gains in welfare that a full insurance against health shocks would bring through consumption smoothing.;In the second chapter, I use a standardized expected utility model to estimate institutionally uninsured families' willingness to pay to be insured against health shocks distinguishing: (1) partial coverage of the risk of health expenditures insurance net of the risk of lost earnings, from, (2) full coverage of the risks associated with health shocks, including lost earnings in addition to health expenditures. I find that Mexican uninsured households would be willing to sacrifice up to five percent of their total quarterly consumption to be insured against breadwinners' health expenditures only, and seven percentage points more to have their consumption fully insured against breadwinners' health shocks.;In the third and last chapter, I characterize some of the adjustment mechanisms used by Mexican households to overcome the economic burden provoked by a breadwinner's health shocks. I assess to what extent households protect their consumption through labor substitution and whether household's ownership of assets is a used to smooth consumption during health shocks. I find evidence of gender-specific labor substitution and I find that families do seem to resort to the selling of their most valuable assets, such as land or properties, to smooth their consumption at the onset of a health shock severely affecting breadwinners' physical capacity.