DP17036 Lifestyle Behaviors and Wealth-Health Gaps in Germany

Author(s): Lukas Mahler, Minchul Yum
Publication Date: February 2022
Keyword(s): Germany, Health inequality, Healthy Lifestyle, Wealth Inequality
JEL(s): D3, E2, I1
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17036

We document significant gaps in wealth across health status over the life cycle in Germany---a country with a universal healthcare system and negligible out-of-pocket medical expenses. To investigate the underlying sources of the empirical patterns in wealth-health gaps, we build a heterogeneous-agent life-cycle model in which health and wealth evolve endogenously. In the model, agents exert efforts to lead a healthy lifestyle, which helps maintain good health status in the future. Effort choices, or lifestyle behaviors, are subject to adjustment costs to capture various aspects of micro-level effort adjustment behaviors in the data. We find that our calibrated model generates around half of the wealth gaps by health observed in the German micro data, and that variations in health-related lifetime outcomes are largely explained by uncertainty realizations over the life cycle, rather than initial conditions at age 25. Our counterfactual experiments indicate that variations in individual health efforts account for over half of the model-generated wealth gaps by health status. Their importance is due not only to the fact that they affect labor income and savings rates, both of which influence wealth accumulation, but also because they act as an amplification device since richer households exert relatively more efforts to maintain a healthy lifestyle.