The Impact of the Health Status on Consumption Behavior

Abstract

How do individuals adjust their consumption behavior in response to a deterioration of their health status? In the light of demographic transition, when the number of individuals who reach a critical age where the probability of functional limitations increases dramatically, understanding how the individual health status influences consumption behavior deserves additional attention. While the theoretical framework is well established and builds on the concept of state dependent utility functions, previous empirical studies either focused on experimental designs and hypothetical questions or did not distinguish between the effects from aging and those effects from changes in the individual health status. This research paper uses empirical data, provided by the Health and Retirement Study and the related Consumption and Activities Mail Survey, to explore the consequences of functional problems in activities of daily living on consumption behavior of individuals above the age of 65; furthermore, the analysis is restricted to consumption of non durable and semi durable goods and dis-aggregates overall consumption into nine global consumption categories. First, the empirical analysis explores a system of seemingly unrelated regressions to estimate the impact of the health status on the relative composition of the consumption basket with respect to different categories of goods and services. Second, a fixed effects model is specified to focus on changes which occur within individuals and contribute to explanations how individual consumption behavior changes over time. Regression results show expected signs and significant coefficients for the impact of changes in the individual health on consumption behavior. Controlling for a powerful set of variables, findings from the empirical analysis separate out a change in consumption that can be solely associated to changes in the health status.