The proposed project models the dynamic behavior of an individual in investing in his/her health in order to quantify the effects of the various behaviors on health outcomes and to thereby evaluate the impacts of alternative public health policies on individual health. Health is considered to be both a consumable commodity as well as human capital that can be produced or degraded by an individual's actions. In the model, individuals make choices about health insurance, smoking, exercise, alcohol use and medical care use. The research will use data from the Health and Retirement Study (HRS) to explain the effects of differences in income, demographics, health insurance, and individual behaviors on health outcomes. Conversely, estimates of the effects of health outcomes, health insurance, income and demographics on the individual behaviors will be computed. In particular the estimates of the importance of gender, race, income, education, age and health status on the probabilities of making choices with regard to health insurance, smoking, exercise, alcohol use and medical care use will be obtained. The estimation methodology will require solving a discrete stochastic dynamic programming problem. Using the optimal decision rules from the solution to this problem a non-linear likelihood function will be constructed after making distributional assumptions about the state variables and the random unobservables in the model. The structural parameters of the model will consequently be obtained by the full information maximization of the non-linear likelihood function. The structural estimation of a dynamic stochastic model of (individual) investment in health will make feasible the comparison of various counterfactual public health policies, including those that involve changes in health insurance coverage and subsidies for medical care costs. Specifically, the structural estimates of the model will be used to generate (hypothetical) population health outcome profiles that will result as a consequence of (hypothetical) changes in health insurance coverage, medical care costs and the behavioral choices about smoking, exercise and alcohol use.
