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Health Heterogeneity, Portfolio Choice and Wealth Inequality

Author

Listed:
  • Juergen Jung

    (Department of Economics, Towson University)

  • Chung Tran

    (Research School of Economics, The Australian National University)

Abstract

We investigate implications of health heterogeneity for savings, portfolio choice, wealth accumulation and inequality over the lifecycle. Using data from the Panel Study of Income Dynamics (PSID 1984–2019) and the Health and Retirement Study (HRS 1992–2018), we first document the long-lasting effects of poor health during the peak earnings period between age 45–55 on the lifecycle patterns of stock market participation and asset portfolio composition across health status in the US. Next, we quantify the importance of this health-wealth portfolio channel using a structural lifecycle model with elastic labor supply, asset portfolio choice, and household heterogeneity in health status, health expenditure, health insurance, and earnings ability. Our results indicate that the presence of portfolio choice with heterogeneous returns significantly amplifies the effects of poor health on wealth accumulation over the lifecycle and wealth inequality. In the model, health insurance, in addition to its traditional role of mitigating exposure to health expenditure shocks, encourages investments into stocks, resulting in relatively lower wealth gaps at retirement. Our results show that reforming Medicare, Medicaid and employer-sponsored health insurance programs can have large impacts on health-wealth inequality in our multi-asset environment with health risk and non-universal health insurance.

Suggested Citation

  • Juergen Jung & Chung Tran, 2023. "Health Heterogeneity, Portfolio Choice and Wealth Inequality," Working Papers 2023-07, Towson University, Department of Economics, revised Jul 2024.
    • Handle: RePEc:tow:wpaper:2023-07
    as

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    File URL: http://webapps.towson.edu/cbe/economics/workingpapers/2023-07.pdf
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    References listed on IDEAS

    as
    1. Anna Aizer, 2003. "Low Take-Up in Medicaid: Does Outreach Matter and for Whom?," American Economic Review, American Economic Association, vol. 93(2), pages 238-241, May.
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    More about this item

    Keywords

    Health and income risks; Health insurance; Heterogeneity; Lifecycle savings; Risky and safe assets; Asset portfolio; Inequality.;
    All these keywords.

    JEL classification:

    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • G52 - Financial Economics - - Household Finance - - - Insurance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • I14 - Health, Education, and Welfare - - Health - - - Health and Inequality

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