The Lifetime Costs of Bad Health

54 Pages Posted: 23 Oct 2017

See all articles by Mariacristina De Nardi

Mariacristina De Nardi

University College London, Economics Dpt.; Federal Reserve Bank of Chicago; National Bureau of Economic Research (NBER) - Public Economics

Svetlana Pashchenko

University of Georgia

Ponpoje Porapakkarm

National Graduate Institute for Policy Studies (GRIPS, Tokyo)

Multiple version iconThere are 3 versions of this paper

Date Written: October 2017

Abstract

Health shocks are an important source of risk. People in bad health work less, earn less, face higher medical expenses, die earlier, and accumulate much less wealth compared to those in good health. Importantly, the dynamics of health are much richer than those implied by a low-order Markov process. We first show that these dynamics can be parsimoniously captured by a combination of some lag-dependence and ex-ante heterogeneity, or health types. We then study the effects of health shocks in a structural life-cycle model with incomplete markets. Our estimated model reproduces the observed inequality in economic outcomes by health status, including the income-health and wealth-health gradients. Our model has several implications concerning the pecuniary and non-pecuniary effects of health shocks over the life-cycle. The (monetary) lifetime costs of bad health are very concentrated and highly unequally distributed across health types, with the largest component of these costs being the loss in labor earnings. The non-pecuniary effects of health are very important along two dimensions. First, individuals value good health mostly because it extends life expectancy. Second, health uncertainty substantially increases lifetime inequality by affecting the variation in lifespans.

Keywords: health, Health Insurance, life-cycle models, medical spending, wealth-health gradient

JEL Classification: D52, D91, E21, H53, I13, I18

Suggested Citation

De Nardi, Mariacristina and Pashchenko, Svetlana and Porapakkarm, Ponpoje, The Lifetime Costs of Bad Health (October 2017). CEPR Discussion Paper No. DP12386, Available at SSRN: https://ssrn.com/abstract=3057320

Mariacristina De Nardi (Contact Author)

University College London, Economics Dpt. ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

Federal Reserve Bank of Chicago ( email )

Research Department
230 South LaSalle Street
Chicago, IL 60604
United States
312 322 5769 (Phone)
312 322 2357 (Fax)

HOME PAGE: http://www.nber.org/~denardim

National Bureau of Economic Research (NBER) - Public Economics ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/~denardim

Svetlana Pashchenko

University of Georgia ( email )

Athens, GA 30602-6254
United States

Ponpoje Porapakkarm

National Graduate Institute for Policy Studies (GRIPS, Tokyo) ( email )

7-22-1 Roppongi, Minato-Ku
Tokyo 106-8677, Tokyo 106-8677
Japan
+818095248741 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
0
Abstract Views
224
PlumX Metrics