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

49 Pages Posted: 26 Feb 2019 Last revised: 29 Nov 2024

See all articles by Itzik Fadlon

Itzik Fadlon

National Bureau of Economic Research (NBER)

Shanthi Ramnath

U.S. Department of the Treasury, Office of Tax Analysis (OTA)

Patricia Tong

RAND Corporation

Date Written: February 2019

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

Fadlon, Itzik and Ramnath, Shanthi and Tong, Patricia, Market Inefficiency and Household Labor Supply: Evidence from Social Security's Survivors Benefits (February 2019). NBER Working Paper No. w25586, Available at SSRN: https://ssrn.com/abstract=3341246

Itzik Fadlon (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shanthi Ramnath

U.S. Department of the Treasury, Office of Tax Analysis (OTA)

1500 Pennsylvania Ave. NW
Washington, DC 20220
United States

Patricia Tong

RAND Corporation

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