Affiliation:
1. University College London, IFS, TSE, and CEPR (email: )
2. University of Torino and CeRP-Collegio Carlo Alberto (email: )
3. Sciences Po (email: )
4. University of Minnesota, Federal Reserve Bank of Minneapolis, CEPR, and NBER (email: )
Abstract
In the United States, 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 US 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. (JEL D12, E21, G22, G51, I10, J14, J26)
Publisher
American Economic Association
Subject
Economics and Econometrics