Abstract
Unhealthy people adapt to their poor state of health and are usually happier than expected by healthy people. In this paper, we investigate how adapting to a deteriorating state of health affects health spending, life expectancy, and the value of life. We set up a life-cycle model in which individuals are subject to physiological aging, calibrate it with data from gerontology, and compare behavior and outcomes of adapting and non-adapting individuals. While adaptation generally increases lifetime utility (by about 2 percent), its impact on health behavior and longevity depends crucially on whether individuals are aware of their adaptive behavior, i.e. whether they adapt in a naive or sophisticated way. We also compute the QALY change implied by health shocks and discuss whether and how adaptation influences results and the desirability of positive health innovations.
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