Household Financial Distress and Initial Endowments: Evidence from the 2008 Financial Crisis

This paper studies in utero exposure to the 2008 financial crisis. Exploiting the sudden and unexpected collapse of the Icelandic economy, I find that first‐trimester exposure to the crisis led to a sizable and significant reduction in birth weight, increased the probability of a low birth weight ( 4000 g). I also find evidence that the collapse reduced the sex ratio, indicating selection in utero due to maternal prenatal stress exposure. My results imply large welfare losses from financial distress that have hitherto been ignored – because children with worse health at birth can expect substantially lower lifetime earnings – and suggest that economic hardships may in general exacerbate income inequalities in the long run as low‐income households are typically more exposed to financial distress. Copyright © 2016 John Wiley & Sons, Ltd.