Events at CERGE-EI

Nicolo Russo, Ph.D.

Goethe University Frankfurt, Germany

Abstract: How does health affect one’s preferences and ability to self-insure? How does it impact one’s valuation of government insurance? I build a life-cycle model in which health affects not only survival, earnings, and medical expenses but also, and importantly, the marginal utility of consumption. While there is previous evidence showing that the effect of health on preferences is important, the literature has not reached a consensus on either its size or its direction. I calibrate my model using data on health, consumption, and income from the Panel Study of Income Dynamics. I find that bad health reduces the marginal utility of (non-medical) consumption and that this effect lowers savings over the life cycle and decreases consumption in old age. I also show that a model without health-dependent preferences does not replicate the degree of self-insurance against health shocks observed in the data. Finally, I find that health-dependent preferences reduce the household valuation of means-tested government insurance programs in the United States.

Full Text: Health-Dependent Preferences, Consumption, and Insurance