Health Shocks and Consumption Smoothing: Evidence from Indonesia

Maria Genoni, Duke University

Uninsured illness events can seriously compromise households' well-being. This paper provides further evidence on the consequences of illness episodes on earnings and consumption in Indonesia. We exploit a rich panel data set that allows combining fixed effects and instrumental variables to address biases associated with the endogeneity of illness. Using deteriorations in physical functioning abilities to measure illness, we find that labor supply and earnings are significantly reduced. However, the effects on consumption seem to be subject to substantial heterogeneity. In particular, the effects vary significantly by age. In addition, we explore informal mechanisms households may be using to smooth out the consequences of these episodes. We find that transfers received from non- co-resident family members play an important role in insuring illness.