Closing Down the Shop: Optimal Health and Wealth Dynamics near the End of Life

Mardi | 2016-05-31
15h-16h20 en sully05

Florian PELGRIN – Julien HUGONNIER – Pascal ST-AMOUR

This paper examines health and wealth distributions under which agents approaching the end of life choose to close down the shop, i.e. a depletion of the health stock is optimally selected (and eventually accelerated), leading to states characterized by indifference between life, and death. We rely on a life cycle model (Hugonnier et al., 2013) with health spending, portfolio, insurance and consumption decisions for which we have closed-form optimal decisions in order to characterize optimal health and wealth dynamics. This model is estimated structurally using HRS data over a population of elders. Under economically plausible, and statistically verified conditions, we end that, unless sufficiently rich and healthy, agents will optimally select expected depletion of their health capital. Moreover, there exists a threshold wealth below which all agent deplete their health, regardless of how healthy they are. Finally, we identify a wealth and health locus below which agents accelerate their health depletion. Importantly, wealth is also expected to decline for all, such that all surviving agents eventually enter the closing down phase.