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Grossman's Health Threshold and Retirement

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  • Titus Galama

    ()

  • Arie Kapteyn

    ()

  • Raquel Fonseca

    ()

  • Pierre-Carl Michaud

    ()

Abstract

The authors formulate a stylized structural model of health, wealth accumulation and retirement decisions building on the human capital framework of health provided by Grossman. They explicitly assume a functional form of the utility function and carefully account for initial conditions, which allow them to derive analytic solutions for the time paths of consumption, health, health investment, savings and retirement. They argue that the Grossman literature has been unnecessarily restrictive in assuming that health is always at Grossman's "optimal" health level. Exploring the properties of corner solutions they find that advances in population health (health capital) can explain the paradox that while population health and mortality have continued to improve in the developed world, retirement ages have continued to fall with retirees pointing to deteriorating health as an important reason for early retirement. They find that improvements in population health decrease the retirement age, while at the same time individuals retire when their health has deteriorated. In their model, workers with higher human capital (say white collar workers) invest more in health and because they stay healthier retire later than those with lower human capital (say blue collar workers) whose health deteriorates faster. Plausibly, most individuals are endowed with an initial stock of health that is substantially greater than the level required to be economically productive.

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Bibliographic Info

Paper provided by RAND Corporation Publications Department in its series Working Papers with number 658.

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Length: 42 pages
Date of creation: Dec 2008
Date of revision:
Handle: RePEc:ran:wpaper:658

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  1. Adams, Peter & Hurd, Michael D. & McFadden, Daniel & Merrill, Angela & Ribeiro, Tiago, 2003. "Healthy, wealthy, and wise? Tests for direct causal paths between health and socioeconomic status," Journal of Econometrics, Elsevier, vol. 112(1), pages 3-56, January.
  2. Norma B. Coe & Gema Zamarro, 2008. "Retirement Effects on Health in Europe," Working Papers 588, RAND Corporation Publications Department.
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  8. Anne C. Case & Angus Deaton, 2003. "Broken Down by Work and Sex: How Our Health Declines," NBER Working Papers 9821, National Bureau of Economic Research, Inc.
  9. B. Douglas Bernheim & Jonathan Skinner & Steven Weinberg, 1997. "What Accounts for the Variation in Retirement Wealth Among U.S. Households?," Working Papers 97035, Stanford University, Department of Economics.
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  12. Ehrlich, Isaac & Chuma, Hiroyuki, 1990. "A Model of the Demand for Longevity and the Value of Life Extension," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 761-82, August.
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  14. David M. Blau, 2008. "Retirement and Consumption in a Life Cycle Model," Journal of Labor Economics, University of Chicago Press, vol. 26, pages 35-71.
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  18. Grossman, Michael, 2000. "The human capital model," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 7, pages 347-408 Elsevier.
  19. Wagstaff, Adam, 1986. "The demand for health : Some new empirical evidence," Journal of Health Economics, Elsevier, vol. 5(3), pages 195-233, September.
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Cited by:
  1. Galama, Titus & Kapteyn, Arie, 2011. "Grossman’s missing health threshold," Journal of Health Economics, Elsevier, vol. 30(5), pages 1044-1056.
  2. Kuhn, Michael & Wrzaczek, Stefan & Prskawetz, Alexia & Feichtinger, Gustav, 2011. "Optimal Choice of Health and Retirement in a Life-Cycle Model," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48681, Verein für Socialpolitik / German Economic Association.
  3. Carl-Johan Dalgaard & Holger Strulik, 2012. "The Genesis of the Golden Age - Accounting for the Rise in Health and Leisure," Discussion Papers 12-10, University of Copenhagen. Department of Economics.

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