Subjective Life Expectancies, Time Preference Heterogeneity, and Wealth Inequality

Abstract

This paper explores how heterogeneity in life expectancy, objective (statistical) as well as subjective, affects savings behavior between healthy and unhealthy people. Using data from the Health and Retirement Study, we show that people in poor health not only have shorter actual lifespan, but are also more pessimistic about their remaining time of life. Using a standard overlapping-generations model, we show that differences in life expectancy can explain one third of the differences in accumulated wealth with an important part driven by pessimism among unhealthy people.