Household Responses to Severe Health Shocks and the Design of Social Insurance

This paper studies how households respond to severe health sho ks and the insuran e role of spousal labor supply. In the empiri al part of the paper, we provide new eviden e on individuals' labor supply responses to spousal health and mortality sho ks. Analyzing administrative data on over 500,000 Danish households in whi h a spouse dies, we nd that survivors immediately in rease their labor supply and that this e e t is entirely driven by those who experien e signi ant in ome losses due to the sho k. Notably, widows who experien e large in ome losses when their husbands die in rease their labor for e parti ipation by more than 11%, while widowers who are signi antly more nan ially stable de rease their labor supply. In ontrast, studying over 70,000 households in whi h a spouse experien es a severe health sho k but survives for whom in ome losses are well-insured in our setting we nd no e onomi ally signi ant spousal labor supply responses, suggesting adequate insuran e overage for morbidity (vs. mortality) sho ks. In the theoreti al part of the paper, we develop a method for welfare analysis of so ial insuran e using only spousal labor supply responses. In parti ular, we show that the labor supply responses of spouses fully identify the welfare gains from insuring households against health and mortality sho ks. Our ndings imply large welfare gains from transfers to survivors and identify e ient ways for targeting government transfers.