To Love or to Pay: Savings and Health Care in Older Age

45 Pages Posted: 30 Oct 2012 Last revised: 17 Dec 2012

See all articles by Loretti Dobrescu

Loretti Dobrescu

University of New South Wales, School of Economics

Date Written: October 15, 2012


This paper develops a dynamic structural life-cycle model to study how heterogeneous health and medical spending shocks affect the savings behavior of the elderly. Individuals are allowed to respond to health shocks in two ways: they can directly pay for their health care expenses (self-insure) or they can rely on health insurance contracts. There are two possible insurance options, one through formal contracts and another through informal care provided by family. Formal contracts may be affected by asymmetric information problems, whereas informal insurance depends on social ties (cohesion) and on bequeathable wealth. I estimate the model on SHARE data using simulated method of moments for four levels of wealth in a sample of single retired Europeans. Counterfactual experiments show that health, medical spending and health insurance are indeed the main drivers of the slow wealth decumulation in old age. I also find that social cohesion rises with age, declines with wealth and is higher in Mediterranean countries than in Central European and Scandinavian countries. Finally, high social cohesion appears typically associated with increased life expectancy.

Keywords: savings, health, health insurance, social cohesion, life expectancy

JEL Classification: D1, D31, E27, H31, H51, I1

Suggested Citation

Dobrescu, Loretti Isabella, To Love or to Pay: Savings and Health Care in Older Age (October 15, 2012). UNSW Australian School of Business Research Paper No. 2012 ECON 51. Available at SSRN: or

Loretti Isabella Dobrescu (Contact Author)

University of New South Wales, School of Economics ( email )

High Street
Sydney, NSW 2052

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