Consumption and Health
AbstractMany 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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Bibliographic InfoArticle provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.
Volume (Year): contributions.6 (2006)
Issue (Month): 1 ()
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Web page: http://www.degruyter.com
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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