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Why Does Consumption Fluctuate in Old Age and How Should the Government Insure It?

Richard Blundell, Margherita Borella, Jeanne Commault, Mariacristina De Nardi

NBER Working Paper No. 27348
Issued in June 2020
NBER Program(s):Economics of Aging, Health Care, Health Economics, Public Economics

In old age, consumption can fluctuate because of shocks to available resources and because health shocks affect utility from consumption. We find that even temporary drops in income and health are associated with drops in consumption and most of the effect of temporary drops in health on consumption stems from the reduction in the marginal utility from consumption that they generate. More precisely, after a health shock, richer households adjust their consumption of luxury goods because their utility of consuming them changes. Poorer households, instead, adjust both their necessary and luxury consumption because of changing resources and utility from consumption.

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Document Object Identifier (DOI): 10.3386/w27348

 
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