Grossman's Health Threshold and Retirement

42 Pages Posted: 27 Jan 2009

See all articles by Titus J. Galama

Titus J. Galama

USC Center for Economic and Social Research

Arie Kapteyn

Dornsife Center for Economic and Social Research - University of Southern California; IZA Institute of Labor Economics

Raquel Fonseca

RAND Corporation

Pierre-Carl Michaud

RAND Corporation; IZA Institute of Labor Economics

Date Written: December 26, 2008

Abstract

The authors formulate a stylized structural model of health, wealth accumulation and retirement decisions building on the human capital framework of health provided by Grossman. They explicitly assume a functional form of the utility function and carefully account for initial conditions, which allow them to derive analytic solutions for the time paths of consumption, health, health investment, savings and retirement. They argue that the Grossman literature has been unnecessarily restrictive in assuming that health is always at Grossman's "optimal" health level. Exploring the properties of corner solutions they find that advances in population health (health capital) can explain the paradox that while population health and mortality have continued to improve in the developed world, retirement ages have continued to fall with retirees pointing to deteriorating health as an important reason for early retirement. They find that improvements in population health decrease the retirement age, while at the same time individuals retire when their health has deteriorated. In their model, workers with higher human capital (say white collar workers) invest more in health and because they stay healthier retire later than those with lower human capital (say blue collar workers) whose health deteriorates faster. Plausibly, most individuals are endowed with an initial stock of health that is substantially greater than the level required to be economically productive.

Keywords: health, demand for health, health capital, medical care, labor, retirement

JEL Classification: I10, I12, J00, J24, J26

Suggested Citation

Galama, Titus J. and Kapteyn, Arie and Fonseca, Raquel and Michaud, Pierre-Carl, Grossman's Health Threshold and Retirement (December 26, 2008). RAND Working Paper Series WR- 658. Available at SSRN: https://ssrn.com/abstract=1333413 or http://dx.doi.org/10.2139/ssrn.1333413

Titus J. Galama (Contact Author)

USC Center for Economic and Social Research ( email )

Playa Vista, CA
United States
+310 430 6358 (Phone)

Arie Kapteyn

Dornsife Center for Economic and Social Research - University of Southern California ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States
310-448-5383 (Phone)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Raquel Fonseca

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

Pierre-Carl Michaud

RAND Corporation ( email )

1776 Main Street
Santa Monica, CA 90407-2138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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