Smoothing consumption in times of illness: Household recourse mechanisms

Abstract

We study the welfare impacts of illness shocks on rural agricultural households in the semi‐arid tropical and humid eastern regions of India. These regions are characterized by rainfed agriculture, missing markets for credit and insurance, and limited access to publicly funded healthcare infrastructure. We find that illness shocks increase households' medical expenditures and reduce wage income. However, aggregate non‐medical, food, and non‐food consumption expenditures are insensitive to illness shocks. Disaggregating illness by the age and the gender of the household members, we observe that illness in male children leads to the largest increase in medical expenditure, and illness in prime‐aged adults leads to the largest decline in per‐capita wage earnings. We also find illness shocks leading to changes in household dietary diversity, higher travel expenditures, and a compensating reduction in spending on education and entertainment. Analysis of risk‐coping strategies reveals that households rely on transfers from kinship networks and loans from informal sources like local moneylenders to smooth consumption. While large landowners rely on gifts from kinship networks, landless and smallholders increase borrowings from informal sources.