Can Wealth Buy Health? A Model of Pecuniary and Non-Pecuniary Investments in Health

Abstract

In this paper, we develop a life cycle model that features pecuniary and non-pecuniary investments in health in order to rationalize the socioeconomic gradients in health and life expectancy in the United States. Agents accumulate health capital, which affects labor productivity, utility, the distribution of medical spending shocks, and life expectancy. We find that unequal health insurance coverage plays a negligible role in generating the observed gaps in health and longevity. Universal health insurance increases preventive medical spending but not time spent in health promoting activities, as individuals are no longer worried about avoiding high curative medical expenditure shocks due to increased health insurance coverage. Our findings suggest that differences in lifetime income, preferences and health shocks are the main determinants of inequality in life expectancy.