Sasha Indarte, Wharton School, University of Pennsylvania
Abstract:
This paper investigates how the expansion of social insurance affects households’ accumulation of debt. Insurance can reduce reliance on debt by lessening the financial impact of adverse events like illness and job loss. But it can also weaken the motive to selfinsure through savings, and households’ improved financial resilience can increase access to credit. Using data on 10 million borrowers and a quasi-experimental research design, we estimate the causal effect of expanded insurance on household debt, exploiting ZIP code-level heterogeneity in exposure to the staggered expansions of one of the largest US social insurance programs: Medicaid. We find that a one percentage point increase in a ZIP code’s Medicaid-eligible population increases credit card borrowing by 0.74%. Decomposing this effect in a model of household borrowing, we show that increased credit supply in response to households’ improved financial resilience fully accounts for this rise in borrowing and contributed 33% of the net welfare gains of expanding Medicaid.