14th journées Louis-André Gérard-Varet

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Life Cycle Responses to Health Insurance Status
Pascal St-Amour, Florian Pelgrin

Last modified: 2015-02-16


Health insurance status can change over the life cycle for exogenous reasons (e.g. Medicare for the elders, PPACA for younger agents, termination of coverage at retirement in employer-provided plans). Durability of the health capital, as well as backward induction suggests that these changes should affect the dynamic life cycle beyond the period at which they occur. The purpose of this paper is to study their lifetime effects on the dynamic optimal allocation (consumption, leisure, health expenditures), status (health, wealth and survival rates), and welfare. We solve, structurally estimate, and simulate a parsimonious life cycle model with endogenous exposition to morbidity and mortality risks to analyze the impact of young (resp. old) insurance status conditional on old (resp. young) coverage. Our results indicate that insured young agents anticipate the post retirement fall in wages by substituting away from leisure, and spending more on health care when young in order to build up their health capital. This inter-temporal substitution is especially strong if uninsured when old, and reflects the durability of health capital, as well as its positive effects on the marginal products of future leisure and health expenses. Lower exposure to OOP risks, less leisure and longer expected horizon result in higher wealth balances when young and insured. Conversely, insured elders find it optimal to reduce precautionary wealth balances and spend more on leisure and health expenses. Health insurance is unambiguously optimal for elders, and for young agents, except early in the life cycle when low financial wealth and high health capital make incomplete hedging optimal.


Demand for Health. Endogenous Morbidity and Mortality Risks. Household Finance. Medicare. Simulated Moments Estimation.