The effect of uncertainty on the demand for medical care, health capital and wealth

Abstract

We analyze the effect of the uncertainty of the incidence of illness on the demand for medical care and on the accumulation of health capital and wealth over the retirement years. We use a simplified version of a dynamic Grossman household production model to characterize patterns of an individual's precautionary behavior. Elderly individuals respond to uncertainty by smoothing their expected utility over time by making specific patterns of purchases of medical care and consumption. We examine these patterns for individuals with different degrees of risk aversion.