Title

Health Status and Health Dynamics in an Empirical Model of Expected Longevity

Department

Economics, Finance, & Quantitative Analysis

Document Type

Article

Publication Date

5-2008

Abstract

Expected longevity is an important factor influencing older individuals’ decisions such as consumption, savings, purchase of life insurance and annuities, claiming of Social Security benefits, and labor supply. It has also been shown to be a good predictor of actual longevity, which in turn is highly correlated with health status. A relatively new literature on health investments under uncertainty, which builds upon the seminal work by Grossman [Grossman, M., 1972. On the concept of health capital and demand for health. Journal of Political Economy 80, 223–255] has directly linked longevity with characteristics, behaviors, and decisions by utility maximizing agents. Our empirical model can be understood within that theoretical framework as estimating a production function of longevity. Using longitudinal data from the Health and Retirement Study, we directly incorporate health dynamics in explaining the variation in expected longevities, and compare two alternative measures of health dynamics: the self-reported health change, and the computed health change based on self-reports of health status. In 38% of the reports in our sample, computed health changes are inconsistent with the direct report on health changes over time. And another 15% of the sample can suffer from information losses if computed changes are used to assess changes in actual health. These potentially serious problems raise doubts regarding the use and interpretation of the computed health changes and even the lagged measures of self-reported health as controls for health dynamics in a variety of empirical settings. Our empirical results, controlling for both subjective and objective measures of health status and unobserved heterogeneity in reporting, suggest that self-reported health changes are a preferred measure of health dynamics.