A Dynamic Model of Health, Addiction, Education, and Wealth
80 Pages Posted: 13 Nov 2015 Last revised: 16 Apr 2019
Date Written: March 06, 2019
This paper formulates and estimates a dynamic model of health, addiction, education, and wealth in order to understand the well-established positive empirical relationship between education and health. In our model, agents make decisions on schooling, consumption of addictive goods, and saving/borrowing over the lifecycle. Agents differ in their endowments of cognitive and noncognitive skills and initial health and face endogenously-determined borrowing constraints. The consumption of unhealthy addictive goods, joined with low levels of cognitive and noncognitive skills, and limited access to credit markets generate a constellation of bad health, and low levels of education and wealth, which is further reinforced by the complementary between education and health as individuals age. The model is estimated on data from National Longitudinal Survey of Youth 97, using a two-step estimation procedure that combines factor analysis and the simulated method of moments. Using the model, we quantify the causal relationship between education and health. We then conduct counterfactual policy experiments to assess (1) how excise tax policies on the consumption of addictive goods affect health, education, and wealth, and (2) how policies that improve endowments affect health, addiction, education, and wealth.
Keywords: Health Capital, Education, Wealth, Human Capital, Rational Addiction, Credit Constraints, Unhealthy Behavior
JEL Classification: I1, I2, J2
Suggested Citation: Suggested Citation