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Health investment and medical risk: New explanations of the portfolio puzzle

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  • Du, You

Abstract

Standard financial portfolio theory has difficulty reconciling that the risky portfolio share rises in wealth, named the “portfolio puzzle”. This paper addresses this puzzle from the health perspective, proposing a life cycle model with endogenous health investment and medical expenditure risk. This calibrated model remarkably matches the data, and this study finds endogenous health investment essential to explain the portfolio puzzle. Furthermore, medical expenditure risk is less significant and has a larger effect on the non-wealthy group than the wealthy group. This work provides health insights into households’ financial behavior. It also suggests that policies promoting the low wealthy to invest more and early in health capital improve their well-being and eventually reduce wealth inequality.

Suggested Citation

  • Du, You, 2023. "Health investment and medical risk: New explanations of the portfolio puzzle," Economic Modelling, Elsevier, vol. 127(C).
    • Handle: RePEc:eee:ecmode:v:127:y:2023:i:c:s0264999323002547
    DOI: 10.1016/j.econmod.2023.106442
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    Cited by:

    1. Ismail, I. & Stam, P.J.A. & Portrait, F.R.M. & van Witteloostuijn, A. & Koolman, X., 2024. "Addressing unanticipated interactions in risk equalization: A machine learning approach to modeling medical expenditure risk," Economic Modelling, Elsevier, vol. 130(C).

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    More about this item

    Keywords

    Household finance; Health and inequality; Life cycle model;
    All these keywords.

    JEL classification:

    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • I14 - Health, Education, and Welfare - - Health - - - Health and Inequality
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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