The Lifetime Costs of Bad Health
56 Pages Posted: 30 Oct 2017 Last revised: 24 Jun 2021
Date Written: October 2017
What are the cumulative effects of health shocks over the life-cycle? The answer depends on the nature of persistence of bad health and the extent to which it changes individuals' economic circumstances. We measure the lifetime costs of bad health using a rich structural model that can reproduce the short- and long-run dynamics of health and health-related inequality in economic outcomes. We explicitly take into account the fact that this inequality can be partly traced back to factors predetermined early in life. Our model has several implications concerning the pecuniary and non-pecuniary effects of health shocks. The life- time costs of bad health are influenced by ex-ante predetermined factors, and the largest component of pecuniary costs is the loss in labor earnings. Because bad health lowers ones' life expectancy, its non-pecuniary effects are large. In particular, through this channel they are very important for individuals' welfare and non-trivially contribute toward lifetime inequality.
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