Investment in Human Capital, Longevity and Moral Hazard in a Stochastic Life-cycle Model of Demand for Health

This paper develops and estimates a life cycle dynamic stochastic discrete choice model of individual decisions about health insurance, exercise, smoking, alcohol consumption and medical treatment in a Grossman (1972) type framework where health is human capital. The model accounts for the effects of moral hazard from health insurance and longevity on health related behaviors. Furthermore, longevity is endogenous to behaviors. The estimation of the model controls for dynamic selection through mortality. In particular it develops and implements a simulation based procedure for dealing with an initial conditions problem that is common in estimating dynamic models. The model is estimated using data from the Health and Retirement Study. Model simulations imply that access to health insurance has considerable impact on medical utilization but there is little moral hazard with respect to other health related behaviors, i.e., alcohol consumption, smoking and exercise. The results also suggest that increases in longevity provide incentives to lead a healthier life-style (the ‘Mickey Mantle’ effect). Hence, one reason that the level of moral hazard in health behaviors may be small is that the dynamic effects of longevity counteract the moral hazard generated by health insurance. The effects of health insurance on health outcomes are found to be small because utilization is largely for palliative rather than preventive or curative purposes.