Pension Research Council: The Boettner Center: Working Paper Library: 2012 Series

Working Paper Library: 2012 Series

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Health Expenditure Risk and Annuitization: Evidence from Medigap Coverage
Daniel W. Sacks
BWP2012-01
Theoretical research suggests that health expenditure risk can have an ambiguous influence on the annuitization decisions of the elderly. I provide empirical evidence on this linkage, by estimating the impact of supplemental Medicare insurance (Medigap) coverage on the annuity demand of older Americans. I use local variation in prices as an instrumental variable to address the possible endogeneity of Medigap coverage, an identification strategy motivated by the fact that Medigap policies are not medically underwritten, and Medigap insurance is required by law to be standardized, so prices reflect neither individual characteristics nor product quality. Medigap coverage has a strong impact on annuitization: the extensive margin elasticity is 0.39, the overall elasticity of private annuity income with respect to Medigap coverage is 0.56. These results are robust to controls for health, wealth, and preferences, as well as other robustness tests. They imply that medical expenditure risk has a large impact on underannuitization.

Functional Disabilities and Nursing Home Admittance
Joelle H. Fong, Benedict SK. Koh, and Olivia S. Mitchell
BWP2012-02

This paper examines how inability to perform activities of daily living relates to the risk of nursing home admission over older adults' life courses. Using longitudinal data on persons over age 50 from the Health and Retirement Study, we show that aging one year boosts the probability of having two or more disabilities by 9 to 12 percent in a multivariate logistic model. Moreover, at least three-fifths of all 65-year-old men and three-quarters of women will experience disability levels during their remaining lifetimes severe enough to trigger nursing home admission. Our analysis also suggests that certain types of disability are more important than others in predicting nursing home admittance and use, which has implications for the design and benefit triggers for long-term care insurance programs.

Identifying Idiosyncratic Career Taste and Skill with Income Risk
Stephen H. Shore, Daniel Barth, and Shane T. Jensen
BWP2012-04
How important to well-being is choosing a career with the right fit? This question is difficult to answer because we observe individuals only in their chosen careers, not in the other (presumably inferior) options they did not choose. To overcome this problem, we use expected utility to cardinalize a logit model of career choice in a setting where we observe the income risk of chosen careers and the risk-aversion of the people who choose them. The key parameter of interest - the importance of idiosyncratic taste and skill in career choice - is identified from the shift in the distribution of income risk with risk aversion. We estimate the model using individual-specific measures of income volatility to proxy for income risk and survey questions about hypothetical income gambles to proxy for risk preference, both from the PSID. We separate idiosyncratic career taste from skill using the pay gap between high and low-income risk people with high and low risk-aversion.
Keywords: occupational choice, career choice, income risk, idiosyncratic taste and skill

Semiparametric Bayesian Modeling of Income Volatility Heterogeneity
Shane T. Jensen and Stephen H. Shore
BWP2012-05
Research on income risk typically treats its proxy--income volatility, the expected magnitude of income changes--as if it were unchanged for an individual over time, the same for everyone at a point in time, or both. In reality, income risk evolves over time, and some people face more of it than others. To model heterogeneity and dynamics in (unobserved) income volatility, we develop a novel semiparametric Bayesian stochastic volatility model. Our Markovian hierarchical Dirichlet process (MHDP) prior augments the recently developed hierarchical Dirichlet process (HDP) prior to accommodate the serial dependence of panel data. We document dynamics and substantial heterogeneity in income volatility.
Keywords: hierarchical Dirichlet process; income volatility; state-space models.

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