Households as Crisis Shock Absorbers

Abstract

In examining social responses to crises, including natural disasters, the focus is normally on the performance of economic, political, and social institutions. However, households play a crucial role in crisis response, serving as shock absorbers as crises affect other institutions. In particular, households are capable of expanding their size and the domain of household production in the face of a crisis and the failed response of other institutions. Doing so on a regular basis when either frequent crises or poor institutional response is expected requires shifts in the structure of human capital within households, and these do not come without costs. This paper offers empirical examples of the shock absorbing role of households drawn from both economic crises and natural disasters. It also explores the “coping costs” of household disaster preparedness and its effects on human capital by analogizing it to the deadweight losses associated with the prevention of theft or defending against inflation. The argument suggests the need for better crisis response policies that allow existing institutions to do their jobs more effectively to avoid the excessive costs associated with unnecessary household human capital restructuring.

Keywords: Crises, Natural Disasters, Household Production, Human Capital, Institutions

JEL Classification: H12, L33, D10