The design of pension and health care policies for the elderly requires that we understand the expenditure decisions of the old. Two fundamental characteristics of the elderly are that their health worsens with age and that it does so at different rate for people in different socio-economic groups (Pijoan-Mas and Rıos-Rull (2015)). The question that we plan to address is how do age and health shape preferences and consumption decisions. Surprisingly, very little work exploring effects of health on consumption Specifically, we aim to estimate the effect of health on the marginal utility of consumption. For this we use a model where the evolution of health is itself endogenous. However, we only need to use the consumption Euler equation to estimate structural parameters. This feature greatly reduces the complications of the process and allows us to be agnostic about how is the actual technology that improves health. We exploit plan to exploit differences in consumption growth by age, education, wealth, and health groups that provide enough variation to allow for identification. We use estimates of health transitions by age, education, and wealth that we can interpret as the outcome of optimal behavior and that provide the variation in the data necessary to produce tight estimates.
We plan to investigate how self-assessed health shapes the appreciation of consumption of people, the marginal utility of consumption. We implement the analysis using data on consumption growth rates and self-assessed health by various groups of the elderly population. The results of the project will tell us how consumption is valued in different health status and how savings responds to changes in health. An additional result of the proposed work will be an assessment of how people view that their health responds to their efforts and their out of pocket expenditures. Another outcome of the project is a measurement of the welfare costs of inequality when health and differential mortality are taken into account.