Expenditure Responses to Adverse Health Shocks: Evidence from a Panel of Colombian Households

Abstract

We analyze the effect of adverse health shocks on households' expenditure shares in different good categories using a fixed-effects approach and a structural approach based on microeconomic theory. We find that households substitute health and food expenditure in response to adverse health shocks. We find substantial heterogeneity in this trade-off between current and future health mediated by access to social protection, job contract type, and location (urban-rural). Households from rural areas --where household heads are more likely to hold informal jobs and lack access to safety nets-- are more vulnerable than others. Our findings suggest that access to formal employment and a higher quality of local institutions can help mitigate the negative consequences of health shocks.