The Effect of Health Care Policy Uncertainty on Households' Consumption and Portfolio Choice

70 Pages Posted: 12 Jul 2019 Last revised: 17 Jan 2022

See all articles by Thomas T. Wiemann

Thomas T. Wiemann

University of Chicago - Department of Economics

Robin L. Lumsdaine

American University - Department of Finance and Real Estate; Erasmus University Rotterdam (EUR) - Department of Econometrics; National Bureau of Economic Research (NBER); Tinbergen Institute

Date Written: February 17, 2020

Abstract

With medical expenditures constituting an increasingly large share of private spending, the continuing policy debate on health care reform in the United States is a potentially important source of households’ financial uncertainty. To quantify the implications of this uncertainty for the real economy, this paper conducts an empirical analysis of the effect of health care policy uncertainty (HCPU) on two channels of households’ economic behavior: consumption and portfolio choice. Using a simple model to illustrate a heterogeneous effect of HCPU, we develop an identification strategy that exploits variation in health to capture exposure to these policy uncertainty shocks. Two complementary semiparametric heterogeneous effects models are introduced that are particularly suited to the analysis of empirically unobserved variables such as health. The results indicate an important effect of HCPU on portfolio choice but provide mixed evidence for the effect on households' total spending. Our estimates corroborate the theoretical prediction that this effect is increasing in households' health problems.

Keywords: Health and Retirement Study (HRS), Semiparametric Methods, Censored Regression, Latent Class Analysis, Model-Based Recursive Partitioning

JEL Classification: C54, D14, D80, E21, I18

Suggested Citation

Wiemann, Thomas T. and Lumsdaine, Robin L., The Effect of Health Care Policy Uncertainty on Households' Consumption and Portfolio Choice (February 17, 2020). Available at SSRN: https://ssrn.com/abstract=3418411 or http://dx.doi.org/10.2139/ssrn.3418411

Thomas T. Wiemann

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Robin L. Lumsdaine (Contact Author)

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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