We analyze funeral arrangements following the deaths of 3,751 people who died between January 2003 and December 2005 in the Africa Centre Demographic Surveillance Area. We find that, on average, households spend the equivalent of a year's income for an adult's funeral, measured at median per capita African (Black) income. Approximately one-quarter of all individuals had some form of insurance, which helped surviving household members defray some fraction of funeral expenses. However, an equal fraction of households borrowed money to pay for the funeral. We develop a model, consistent with ethnographic work in this area, in which households respond to social pressure to bury their dead in a style consistent with the observed social status of the household and that of the deceased. Households that cannot afford a funeral commensurate with social expectations must borrow money to pay for the funeral. The model leads to empirical tests, and we find results consistent with our model of household decision-making.That adds a new dimension in my own thinking about why funerals are expensive even in the United States. My grandfather died recently and we paid for the funeral. He was a military veteran and so technically the VA could've buried him for free, but for various social reasons - wanting proximity to his grave, for instance, but also wanting him buried with his family - we opted to have him buried in Mississippi which was much more expensive to do. I had it in my mind funerals were expensive because of occupational licensing and the fact that funeral homes have a quasi-monopoly over the right to bury cadavers. In that explanation, the funeral home chooses a price in equilibrium that maximizes their profits, which if they cannot price discriminate requires that they charge everyone the same price and thus the price is too high and too few bodies are buried. Maybe they're cremated instead or buried at the VA. Anyway, point being, the local funeral home probably does function in part like a monopolist, and so maybe this is true.
You could get this kind of result not just from government regulations that keep competitors out. It might also be explained by the natural economies of scale associated with funeral homes. To run a funeral home requires a big fixed cost, which is a huge plot of land to bury the bodies. Given high fixed costs and low marginal costs, a single funeralhome can provide all of the markets' burials at much lower average cost to the degree that they can bury a lot of bodies. And like the calculus my family did, even though there are thousands of funeral homes in the United States, these funeral homes are really not direct competitors for one another since the demand for a burial is closely tied to family's accessibility, and that means the market may really only be a small town or city. And in a small town, you can imagine the funeral home operating as a monopolist because of the cost advantage they'd have due to the economies of scale. I suspect, actually, that this is exactly part of the story for funeral home firm structure.
But those supply stories, as probably useful as they are, maybe don't really get at the demand side for burials, and I think this is the first paper I've seen that does. People bury a certain way based on social norms, and those norms are based on some kind of "modal burial" to which others appeal. This therefore means a certain kind of burial will be more common over others, and probably decreases the price elasticity of demand for burials so that funeral homes can charge even higher prices since for the monopolist, the price markup over marginal cost is directly proportional to how elastic demand is. This is of course just focused on South Africa, but at least as I think it out loud, I can see why it might be actually a more general phenomenon.
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