Health Heterogeneity, Portfolio Choice and Wealth Inequality

This paper studies how health heterogeneity affects portfolio choice and wealth inequality over the life cycle. We document large and persistent differences in stock market participation, portfolio risk exposure, wealth accumulation and inequality by health status in the United States. To interpret these patterns, we develop a structural life cycle model with health, elastic labor supply, health insurance, and portfolio choice between risky and safe assets, subject to idiosyncratic shocks to health, medical expenditures, earnings capacity, and investment returns. The model quantifies a health–wealth portfolio mechanism through which better health facilitates participation in high-return assets, generating heterogeneous returns that amplify wealth inequality through compounding. Counterfactual simulations show that this channel accounts for a substantial share of observed wealth gaps across health groups and over the life cycle. We further show that health insurance expansion can mitigate wealth inequality not only by insuring medical expenditures, but also by increasing risky-asset participation and reducing return heterogeneity in our two-asset model.