The Welfare Effects of Non-Linear Health Dynamics

coming soon, with Chiara dal Bianco
  • Abstract
    We generate a continuous measure of health to estimate a non-parametric model of health dynamics, showing that adverse health shocks are highly persistent when suffered by people in poor health, a pattern that cannot be accounted for by canonical models. We incorporate this health measure into a life-cycle model of consumption, savings, and labor force participation. After estimating the model parameters, we simulate the effects of health shocks on economic outcomes. We find that bad health shocks have persistent adverse economic effects that are more dramatic for poor individuals starting in bad health. Bad health shocks also increase the dispersion of asset accumulation within this category of individuals. We show that a canonical model of health dynamics would not be able to uncover these effects.