Life-cycle behaviour in the face of large shocks to health

Life-cycle behaviour in the face of large shocks to health’ is a stand-alone research project (P 30665 –G27) funded by the Austrian Science Fund (FWF)

Typically, life-cycle models of optimal health behaviour are based on an ex-ante view, i.e. a representative individual faces a depreciation of a health stock (Grossman 1972), a mortality risk (Ehrlich 1990), or is subject to the accumulation of health deficits (Dalgaard and Strulik 2014). The optimal behaviour over the life-cycle is described in light of these ‚average‘ processes.

However, in the real world health does not develop smoothly over the life-course, but is subject to smaller or greater shocks. Large shocks, such as accidents and/or the onset of (life-threatening and/or chronic) diseases, have the propensity to affect survival probability, income and well-being as well as their dynamics and, thus, the entire life-course. In consequence, individuals are prone to alter life-cycle behaviour in the face of health shocks. This includes both the (ex-post) adjustment of behaviour in response to a shock and anticipatory/preventive behaviour (ex-ante).

In this project, we study the implications of large health shocks for the individual and its life-course. We compare different types of anticipation (full anticipation, myopic), and consider the effects of health and disability insurance, as well as longevity insurance through the annuity market.