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

Author

Listed:
  • Itzik Fadlon
  • Shanthi P. Ramnath
  • Patricia K. Tong

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.

Suggested Citation

  • Itzik Fadlon & Shanthi P. Ramnath & Patricia K. Tong, 2019. "Market Inefficiency and Household Labor Supply: Evidence from Social Security’s Survivors Benefits," NBER Working Papers 25586, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:25586
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    More about this item

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • H0 - Public Economics - - General
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • I1 - Health, Education, and Welfare - - Health
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
    • J2 - Labor and Demographic Economics - - Demand and Supply of Labor

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