The Effect of Health Care Policy Uncertainty on Households' Consumption and Portfolio Choice
70 Pages Posted: 12 Jul 2019 Last revised: 17 Jan 2022
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
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