A Dynamic Model of Health, Education, and Wealth with Credit Constraints and Rational Addiction∗

This paper develops and structurally estimates a dynamic model of health, education, and wealth. The model identifies the causal effects of different mechanisms through which health, education, and wealth impact each other over a lifecycle. Using the estimated model, we decompose the causal effects of education on health into the direct benefit of improving productivity in a health production function, and the indirect benefit of reducing unhealthy behavior. We show that rational addiction amplifies the disparity in unhealthy behavior by education groups, and it also helps to shape the lifecycle pattern of unhealthy behavior. We find that relaxing credit constraints can increase 4-year college completion and improve health indirectly. Finally, we show that both cognitive and noncognitive factors are also important determinants of health, education,and wealth. JEL codes: I1, I2, J2