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« February 18, 2008 | Main | February 23, 2008 »

22 February 2008

Bus Accidents as Random Health Shocks

A major item of interest in applied health economics is to understand the impact of health shocks on household income, investments and consumption. This relation is particularly important in developing countries that don’t have programs like universal health insurance or social insurance like Medicaid. Alas it’s also a major challenge to establish causal effects and mechanisms through which the shocks might operate. A main culprit is endogeneity, since health affects wealth and vice versa. As result there is a huge and truly inter-disciplinary literature on the topic, much of it with suspicious identification strategies.

The main struggle is to find a plausibly exogenous exposure to health shocks that have real-life relevance. A new paper by Manoj Mohanan takes this challenge seriously and looks at the effect of health shocks from bus accidents on household’s consumption, and examines what mechanisms households rely on to smooth consumption. (Full disclosure: Manoj is a classmate of mine, and I really like his work!)

To address the endogeneity problem, the paper focuses on people who have been in bus accidents as recorded by the state-run bus company in Karnataka, India. Clearly, finding a good control group is critical: people who travel on public buses may be different from those who don’t. For starters, they actually took the risk of getting on a bus – if you have ever been on the road in a developing country you’ll know what this means. Manoj’s approach is to select unexposed individuals among travelers on the same bus route, after matching on age, sex and geographic area of residence. Hence, conditional on these factors, the bus accident can be treated as exogenous.

He then compares the two groups on various dimensions. He finds that households reduce educational and festival spending by a large amount, but appear to be able to smooth food and housing consumption. He is unable to find effects on assets or labor supply. The principal coping mechanism is debt accumulation. Overall this suggests that not all is well: debt traps aside, reducing investments in education could be very costly in the long run (on this point see also Chetty and Looney, 2006).

* Chetty, R. and Looney, A. (2006) ``Consumption smoothing and the welfare consequences of social insurance in developing economies'' Journal of Public Economics, 90: 2351-2356.

Posted by Sebastian Bauhoff at 10:00 AM