Citation:
Paper | 3.56 MB |
Abstract:
We propose a framework to understand the distribution of individual wellbeing
and its change over time with an application to the U.S. elderly population.
Using data from the Health and Retirement Study, we estimate life-cycle dynamics
and simulate individual outcome paths starting from age sixty. We use an
expected utility framework and the simulated profiles to construct a measure of
individual welfare that incorporates differences in consumption, leisure, health,
and mortality. Our measure suggests substantial variation in welfare across individuals
driven foremost by gaps in health and mortality followed by gaps in
consumption. Incorporating the utility cost of living with poor health into elderly
welfare substantially increases overall inequality. Elderly welfare inequality has
increased over time due to growing gaps in consumption, health, and mortality.
Disparity measures based on cross-sectional income or consumption at age sixty
underestimate aggregate welfare inequality. Moreover, health at age sixty is a
better indicator of individual well-being rank than income or consumption.