RT Journal Article
SR Electronic
T1 To Love or to Pay
JF Journal of Human Resources
JO J Hum Resour
FD University of Wisconsin Press
SP 254
OP 299
DO 10.3368/jhr.50.1.254
VO 50
IS 1
A1 Loretti I. Dobrescu
YR 2015
UL http://jhr.uwpress.org/content/50/1/254.abstract
AB This paper develops a dynamic structural lifecycle model to study how heterogeneous health and medical spending shocks affect the savings behavior of the elderly. Individuals are allowed to respond to health shocks in two ways: They can directly pay for their health care expenses (self-insure) or they can rely on health insurance contracts. There are two possible insurance options, one through formal contracts and another through informal care provided by family. Formal contracts may be affected by asymmetric information problems whereas informal insurance depends on social ties (cohesion) and on bequeathable wealth. I estimate the model on SHARE data using simulated method of moments for four levels of wealth in a sample of single retired Europeans. Counterfactual experiments show that health, medical spending, and health insurance are indeed the main drivers of the slow wealth decumulation in old age. I also find that social cohesion rises with age, declines with wealth, and is higher in Mediterranean countries than in Central European and Scandinavian countries. Finally, high social cohesion appears typically associated with increased life expectancy.