Market Inefficiency and Household Labor Supply: Evidence from Social Security’s Survivors Benefits

Itzik Fadlon, Shanthi Ramnath and Patricia K. Tong

No 25586, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the effects of the Social Security survivors benefits program on household labor supply and the efficiency implications for insurance and credit markets. We use U.S. population tax records and exploit a sharp age discontinuity in benefit eligibility for identification. We find that eligibility induces considerable reductions in labor supply both among newly-widowed households in the immediate post-shock periods and among already-widowed households whose benefit receipt is entirely predictable. The evidence points to liquidity constraints, rather than myopia, as a leading operative mechanism underlying household responses to anticipated benefits. Our findings identify important inefficiencies in the life insurance market and in the allocation of credit. Our results further highlight the protective insurance role of the social program and the importance of liquidity provided by the government, and they suggest potential gains from expanding and smoothing the program’s benefit schedule.

JEL-codes: D1 D61 G22 H0 H55 I1 I38 J2 (search for similar items in EconPapers)
Date: 2019-02
New Economics Papers: this item is included in nep-age, nep-dem, nep-ias, nep-lma and nep-pbe
Note: AG LS PE
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Citations: View citations in EconPapers (13)

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