Closing Down the Shop: Optimal Health and Wealth Dynamics Near the End of Life

Abstract

Near the end of life, health declines, mortality risk increases and curative is replaced by uninsured long-term care, accelerating the fall in wealth. Whereas standard explanations emphasize inevitable aging processes, we propose a com- plementary closing down the shop justification where agents’ decisions affect their health and the timing of death. Despite preferring to live, individuals optimally deplete their health and wealth towards levels associated with high death risk and indifference between life and death. Reinstating exogenous aging processes reinforces the relevance of closing down. Using HRS data for elders, a structural estimation of the closed-form decisions identifies and tests conditions for these strategies to be optimal and confirm their economic relevance. We also discuss why policy intervention to reduce the incidence of closing down, although feasible, is not warranted.