Increasing healthcare costs are a big concern for the wellbeing of liquidity-constrained households. This paper evaluates the effect of binding liquidity constraints on healthcare spending decisions. Further, the paper compares the effect of liquidity constraints on healthcare expenditure with the effect on non-health consumption in particular on food consumption. I extend a standard incomplete markets model with a health capital in the felicity function. Theoretically, I show that households reduce their healthcare expenditure due to the binding liquidity constraints in the current period, whereas expenditure declines in the next period due to the expected binding constraints one period ahead. I use the extended model to test the incidence of binding liquidity constraints with a linearized Euler equation. Empirically, I show that the test of liquidity constraints for healthcare expenditure reveals different implications than a standard test of liquidity constraints for nondurable consumption. In particular, current binding constraints and expected binding constraints lead to the opposite direction of bias when the liquidity constraints are omitted. The resulting overall bias depends on which constraint has a stronger effect. Moreover, the income elasticity of healthcare expenditure varies significantly between asset poor and rich families, more than the elasticity of non-health consumption among wealth quintiles. Altogether, my findings show that the effects of liquidity constraints are heterogeneous across households and across expenditure categories.
Estimating income elasticity of consumption is found to be a challenging task. The causal impact of income changes on expenditure is hard to measure due to endogeneity of the treatment variable income. I use a shift-share instrumental variable design a la Bartik (1991) to mitigate the endogeneity concerns by exploiting variation due to local labor market exposure to aggregate shocks. I estimate the income elasticity of consumption that results from the changes in national employment growth in industries weighted with regional employment share of the industry. I find an average elasticity of total household consumption in the ranges between 0.4 to 0.53 depending on the construction of the instrument. Food consumption elasticity ranges between 0.11 to 0.2 though is not significantly estimated. Of particular interest for income elasticity estimates is the household out-of-pocket healthcare expenditure which has an elasticity around 3.14 to 3.59. This finding adds to the discussion of health spending being a luxury good with an elasticity above one which is found in aggregate cross-country or time-series estimates. I find elasticities above one using household level micro consumption and regional employment growth data whereas micro studies usually conclude health expenditure elasticities around zero.
This paper presents several stylized facts on how households allocate wealth among asset classes, how portfolio allocation changes over the lifecycle and over the business cycle, and how portfolio and income are related. The paper combines various survey data to show that household income and portfolio allocation are highly correlated especially for middle income households. Asset accumulation have an inverted-V shape over the lifecycle whereas debt is front-loaded in working ages. Income and consumption follow a hump-shape over the lifecycle. Old households hold assets in liquid forms. As for the business cycle, the Great Recession has devastating effects on the welfare of households such that both networth and consumption declined, and poverty rates increased. The effect is more severe for non-white, low educated and female headed households.
Liquidity constraints and present-biased preferences are considered as alternative explanations for the non-optimal household decisions especially among the poor. I propose a model where present bias arises endogenously. Time inconsistency arises due to a lasting effect of binding constraints onto the preferences which alter the optimal decision relative to a time-consistent decision maker more than one period even for nondurable goods. The model serves as a micro foundation for the quasi-hyperbolic discounting for the ever-constrained households. The bias factor is updated slowly based on the credit history which results in heterogeneity in the degree of present bias among households.
The accumulator industry exhibits a typical example of a vertical market structure, where waste accumulators are collected, then recycled in order to extract lead, which is subsequently used as the main input in the production of new accumulators. Through a theoretical model the thesis analyzes the welfare implications of the extent of competition in such a market structure. It replicates the well-known result that there is an incentive for firms to vertically integrate; yet also shows that enforcing competition is not welfare-enhancing.