Working Paper: CEPR ID: DP17036
Authors: Lukas Mahler; Minchul Yum
Abstract: We document significant gaps in wealth across health status over the life cycle in Germany---a country with a universal healthcare system and negligible out-of-pocket medical expenses. To investigate the underlying sources of the empirical patterns in wealth-health gaps, we build a heterogeneous-agent life-cycle model in which health and wealth evolve endogenously. In the model, agents exert efforts to lead a healthy lifestyle, which helps maintain good health status in the future. Effort choices, or lifestyle behaviors, are subject to adjustment costs to capture various aspects of micro-level effort adjustment behaviors in the data. We find that our calibrated model generates around half of the wealth gaps by health observed in the German micro data, and that variations in health-related lifetime outcomes are largely explained by uncertainty realizations over the life cycle, rather than initial conditions at age 25. Our counterfactual experiments indicate that variations in individual health efforts account for over half of the model-generated wealth gaps by health status. Their importance is due not only to the fact that they affect labor income and savings rates, both of which influence wealth accumulation, but also because they act as an amplification device since richer households exert relatively more efforts to maintain a healthy lifestyle
Keywords: health inequality; wealth inequality; healthy lifestyle; germany
JEL Codes: E2; D3; I1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Variations in individual health efforts (I12) | Wealth gaps (D31) |
| Health behaviors (I12) | Health outcomes (I14) |
| Health outcomes (I14) | Labor income (J39) |
| Labor income (J39) | Wealth accumulation (E21) |
| Health behaviors (I12) | Labor income (J39) |
| Health outcomes (I14) | Savings rates (E21) |
| Health behaviors (I12) | Savings rates (E21) |
| Health (I19) | Labor income (J39) |
| Health (I19) | Wealth accumulation (E21) |
| Better health (I19) | Increased labor income and productivity (J39) |
| Wealthier individuals (D31) | More effort to maintain a healthy lifestyle (I12) |
| Poor lifestyle choices (I12) | Persistently higher wealth-health gaps (I14) |