Heterogeneity, State Dependence and Health

In this paper, we use longitudinal data on Self-Reported Health Status from the Panel Study of Income Dynamics to estimate a model of the evolution of health over the life-cycle. The model allows for two sources of persistence in health: unobserved heterogeneity, which models an individual’s (unobserved) ability to cope with health shocks, and state dependence, which models the extent to which the ability to cope with health shocks depends on health status. We allow for flexibility in both sources of persistence. Estimation indicates that heterogeneity is an important determinant of health suggesting that a person’s health today has important antecedents earlier on in life. We also find evidence of state dependence. However, its magnitude depends crucially on the individual’s age and unobserved heterogeneity. The relative contributions of heterogeneity and state dependence that we uncover have different implications for how health policy should be conducted.