Working Paper: CEPR ID: DP18047
Authors: Richard Blundell; Margherita Borella; Jeanne Commault; Mariacristina De Nardi
Abstract: In the U.S, after age 65, households face income and health risks and a large fraction of these risks are transitory. While consumption significantly responds to transitory income shocks, out-of-pocket medical expenses do not. In contrast, both consumption and out-of-pocket medical expenses respond to transitory health shocks. Thus, most U.S. elderly keep their out-of-pocket medical expenses close to a satiation point that varies with health. Consumption responds to health shocks mostly because adverse health shocks reduce the marginal utility of consumption. The effect of health on marginal utility changes the optimal transfers due to health shocks.
Keywords: consumption; insurance
JEL Codes: D12; E21; H31; I13; D15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| transitory income shocks (J69) | nondurable consumption (E21) |
| transitory income shocks (J69) | out-of-pocket medical expenses (H51) |
| transitory health shocks (I12) | nondurable consumption (E21) |
| transitory health shocks (I12) | out-of-pocket medical expenses (H51) |
| transitory health shocks (I12) | out-of-pocket medical expenses (lower-wealth households) (D14) |
| transitory health shocks (I12) | marginal utility of consumption (D11) |
| marginal utility of consumption (D11) | consumption response to health shocks (I12) |
| transitory health shocks (I12) | consumption response to health shocks (I12) |