Precautionary Savings in China: the Role of Health Shocks (JMP)
Abstract: We study the policy effect of the health shocks on the savings from the perspective of the prepayment of the medical expenses with heterogeneous agents and endogenous mortality rate. We found that rich agents are not affected by the prepayment while the saving patterns of the poor agents change significantly. Using the the Assets and Health Dynamics Among the Oldest Old (AHEAD) data and performing the counterfactual experiment, we found the savings of the poor are four times higher than the case with no prepayment. In total, the savings will increase by more than 13%. This not only shed light to the savings in China that the poor people will save more to prepare for the prepayment to reduce the mortality rate but also provided a lower bound to the Chinese savings considering larger fraction of poor people compared the United States.