Health investment and medical risk: New explanations of the portfolio puzzle

You Du

Economic Modelling, 2023, vol. 127, issue C

Abstract: Standard financial portfolio theory has difficulty reconciling that the risky portfolio share rises in wealth, named the “portfolio puzzle”. This paper addresses this puzzle from the health perspective, proposing a life cycle model with endogenous health investment and medical expenditure risk. This calibrated model remarkably matches the data, and this study finds endogenous health investment essential to explain the portfolio puzzle. Furthermore, medical expenditure risk is less significant and has a larger effect on the non-wealthy group than the wealthy group. This work provides health insights into households’ financial behavior. It also suggests that policies promoting the low wealthy to invest more and early in health capital improve their well-being and eventually reduce wealth inequality.

Keywords: Household finance; Health and inequality; Life cycle model (search for similar items in EconPapers)
JEL-codes: C61 G51 I14 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:127:y:2023:i:c:s0264999323002547

DOI: 10.1016/j.econmod.2023.106442

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