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Abstract

Many studies show that individuals do not perfectly smooth consumption at older ages. We argue that an important explanation is that health status declines with age, making consumption at older ages less desirable. We incorporate health status into a standard incomplete markets life-cycle model, by allowing the marginal utility of consumption to increase with health status. Life-cycle income, mortality risk and health status are exogenous in the model and calibrated on Swedish data. Life-cycle consumption is endogenous and matches well Swedish Consumer Expenditure Survey data; consumption expenditure increase with age until about 60 years, and then falls with about 25% to 80 years. An alternative model with mortality risk, but without health status, fails in capturing the fall in consumption with age seen in the data.

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File URL: http://www.bepress.com/cgi/viewcontent.cgi?article=1314&context=bejm
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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): contributions.6 (2006)
Issue (Month): 1 ()
Pages: 6

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Handle: RePEc:bpj:bejmac:v:contributions.6:y:2006:i:1:n:6

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Web page: http://www.degruyter.com

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Related research

Keywords: consumption; health; savings;

Find related papers by JEL classification:

• D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
• D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
• D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
• I12 - Health, Education, and Welfare - - Health - - - Health Production

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Cited by:

1. Potrafke, Niklas, 2010. "The growth of public health expenditures in OECD countries: Do government ideology and electoral motives matter?," Journal of Health Economics, Elsevier, vol. 29(6), pages 797-810, December.
   
   • Potrafke, Niklas, 2010. "The growth of public health expenditures in OECD countries: do government ideology and electoral motives matter?," MPRA Paper 24083, University Library of Munich, Germany.
2. Karsten Jeske & Sagiri Kitao, 2006. "Health Insurance and Tax Policy," 2006 Meeting Papers 57, Society for Economic Dynamics.
   
   • Karsten Jeske & Sagiri Kitao, 2005. "Health insurance and tax policy," Working Paper 2005-14, Federal Reserve Bank of Atlanta.
3. Hammitt, James K. & Haninger, Kevin & Treich, Nicolas, 2009. "The Effect of Health and Longevity on Financial Risk-Tolerance," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
4. Feigenbaum, James, 2008. "Information shocks and precautionary saving," Journal of Economic Dynamics and Control, Elsevier, vol. 32(12), pages 3917-3938, December.
5. Gori, Luca & Sodini, Mauro, 2011. "Nonlinear dynamics in an OLG growth model with young and old age labour supply: the role of public health expenditure," MPRA Paper 28180, University Library of Munich, Germany.
   
   • Luca Gori & Mauro Sodini, 2011. "Nonlinear Dynamics in an OLG Growth Model with Young and Old Age Labour Supply: The Role of Public Health Expenditure," Computational Economics, Society for Computational Economics, vol. 38(3), pages 261-275, October.

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