Health and Financial Fragility: Evidence from Car Crashes and Consumer Bankruptcy

November 20, 2013 Dear Colleagues: During the upcoming workshop, I will present results from two ongoing projects that explore the relationship between health shocks and financial stress. The first looks at shocks arising from sudden trauma (car crashes) and is described in the attached paper, a version of which I presented at Columbia’s faculty workshop in 2012. The second project studies shocks arising from cancer diagnoses. This project is at an early stage. Although a paper is not ready yet (I hope to circulate a very rough draft in the coming days), I will present preliminary results at the workshop. The two projects can be summarized by the following abstract: We document the endogeneity of health shocks using novel administrative data on two of the most important shocks experienced by consumers: trauma and cancer diagnoses. We link data on both types of shocks to bankruptcy filing data. Although it is well known that households exhibit substantial heterogeneity in financial fragility, we show that household financial fragility is positively correlated with the probability that households experience health shocks. This endogeneity potentially generates an upward bias in previous studies examining the effects of heath shocks on household financial outcomes, such as bankruptcy. We show that this bias can be mitigated by running within-­‐‐shock regressions. Assuming shock severity is a proxy for household financial fragility prior to the shock, we subset on households who suffered comparable shocks at different points in time. Within a given period, household who experienced a shock can be viewed as a treatment group and households who experienced the same shock after that period can be viewed as a control group. Applying this framework, we find that the effect of cancer diagnoses on bankruptcy filing rates is substantially smaller than prior estimates and varies substantially by type of trauma and cancer. These findings highlight the difficulty in measuring the relationship 1111 East 60th Street | Chicago, Illinois 60637 phone 773-834-8698 | f ax 773-702-0730 e -ma i l [email protected] www.law.uchicago.edu