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(previously distributed: under the title "The welfare effects of nonlinear health dynamics")
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Abstract
We study how nonlinear, state-dependent health dynamics shape economic behavior, inequality, and the evaluation of disability insurance at older ages.
Using English panel data, we construct a continuous health index and estimate its dynamics with a flexible quantile-based method that allows persistence to vary
across health states.
We find that adverse health realizations are both larger and more persistent among individuals in poor health.
Embedding the estimated process into a life-cycle model, we show that these state-dependent nonlinearities generate substantial losses in assets and welfare for economically vulnerable individuals--those with poor health and low wealth. Misspecifying health dynamics as state-independent attenuates these losses and leads to distorted savings behavior, with effects concentrated among vulnerable individuals.
Finally, we find that the welfare losses of removing disability insurance are highly heterogeneous across health types, and are overstated by a state-independent health process.
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CitationBibTeX
Dal Bianco, Chiara, and Andrea Moro. "The economic effects of nonlinear health dynamics: estimates from a dynamic life-cycle model,"
arXiv/econ.GN working paper, under revision 2207.03816,
January
2026
@article{dalbianco-moro-nonlinear-health-2026,
title = "The economic effects of nonlinear health dynamics: estimates from a dynamic life-cycle model",
author = "{Dal Bianco, Chiara} and Andrea Moro",
year = "2026",
month = " January",
journal = "arXiv/econ.GN working paper, under revision",
volume = "2207.03816",
url = "https://andreamoro.net/assets/papers/nonlinear_health.pdf"
}