Health events, household wealth and debt holdings: Evidence from the health and retirement study

Patryk D Babiarz, Purdue University

Abstract

The dissertation is composed of three independent studies that examine the effects of health events on household wealth, debt holdings and health investment behavior. The first study investigates the role of the unsecured credit market as a potential mechanism for intertemporal transfers of income in times of financial hardship caused by health adversities. The ability to borrow through unsecured markets is especially important to households with low financial assets. Unfortunately, households with low financial assets have been previously characterized as particularly likely to face borrowing constraints. However, recent improvements in accessibility and generosity of credit markets can mitigate the borrowing constraints of these households. Results show that the onset of an adverse health condition is associated with an average of 9 percent increase of unsecured debt. This effect is not uniform across households. Families in the bottom quartile of financial assets borrow considerably more than households with above median financial assets. The second study builds on the theory of precautionary saving which predicts that uncertainty of future depresses consumption and increases the accumulation of wealth. This emergency wealth creates a safety net against income shocks or unexpected expenditures, such as catastrophic healthcare charges. The ownership of health insurance reduces the risk of unexpected healthcare costs. Therefore, the ownership of health insurance should reduce the strength of the precautionary saving motive. The goal of the second study is to investigate whether Medicare enrollment and household asset accumulation patterns are consistent with the theory of precautionary saving. Medicare eligibility is exogenously determined using age of the insured. Thus, Medicare enrollment does not correlate with other household characteristics that determine precautionary wealth accumulation and ownership of other types of health insurance. Findings show that non-retirement financial assets of households enrolled in Medicare are over 10 percent lower compared to households without Medicare. The third study examines returns to preventive healthcare expenditures and preventive behaviors. It is widely believed that by engaging in preventive behaviors and purchasing preventive medical services individuals reduce the probability of the future outbreak of an adverse health condition and in consequence lower future healthcare costs. Building on the assumption that the share of preventive expenditures in total out-of-pocket expenditures is higher for individuals who are in good health, the study concludes that past preventive healthcare expenditures reduce the rate of growth of future healthcare expenditures and produce favorable health outcomes.

Degree

Ph.D.

Advisors

Yilmazer, Purdue University.

Subject Area

Home economics|Economics

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