2018, No. 3
Abstracts of Selected Recent NBER Working Papers
How Persistent Low Expected Returns Alter Optimal Life Cycle Saving, Investment, and Retirement Behavior
Vanya Horneff, Raimond Maurer, and Olivia S. Mitchell
This paper explores how an environment of persistent low returns influences saving, investing, and retirement behaviors, as compared to what in the past had been thought of as more “normal” financial conditions. Our calibrated lifecycle dynamic model with realistic tax, minimum distribution, and Social Security benefit rules produces results that agree with observed saving, work, and claiming age behavior of U.S. households. In particular, our model generates a large peak at the earliest claiming age at 62, as in the data. Also in line with the evidence, our baseline results show a smaller second peak at the (system-defined) full retirement age of 66. In the context of a zero return environment, we show that workers will optimally devote more of their savings to non-retirement accounts and less to 401(k) accounts, since the relative appeal of investing in taxable versus tax-qualified retirement accounts is lower in a low return setting. Finally, we show that people claim Social Security benefits later in a low interest rate environment.
Effects of Expanding Health Screening on Treatment — What Should We Expect? What Can We Learn?
Rebecca Mary Myerson, Darius Lakdawalla, Lisandro D. Colantonio, Monika Safford, and David Meltzer
Screening interventions can produce very different treatment outcomes, depending on the reasons why patients had been unscreened in the first place. Economists have paid scant attention to these complexities and their implications for evaluating screening programs. In this paper, we propose a simple economic framework to guide policy-makers and analysts in designing and evaluating the impact of screening on treatment uptake. We apply these insights to several salient empirical examples that illustrate the different kinds of effects screening programs might produce. Our empirical examples focus on contexts relevant to the top cause of death in the United States, heart disease. We find that currently undiagnosed patients differ from currently diagnosed patients in important ways, leading to lower predicted uptake of recommended treatment if these patients were diagnosed. Additionally, changes in the composition of diagnosed patients can produce misleading conclusions during policy analysis, such as spurious reductions in measured health system performance as screening expands.
The Retirement-Consumption Puzzle: New Evidence from Personal Finances
Arna Olafsson and Michaela Pagel
This paper uses a detailed panel of individual spending, income, account balances, and credit limits from a personal finance management software provider to investigate how expenditures, liquid savings, and consumer debt change around retirement. The longitudinal nature of our data allows us to estimate individual fixed-effects regressions and thereby control for all selection on time-invariant (un)observables. We provide new evidence on the retirement-consumption puzzle and on whether individuals save adequately for retirement. We find that, upon retirement, individuals reduce their spending in both work-related and leisure categories. However, we feel that it is difficult to tell conclusively whether expenses are work related or not, even with the best data. We thus look at household finances and find that individuals de-lever upon retirement by reducing consumer debt and increasing liquid savings. We argue that these findings are difficult to rationalize via, for example, work-related expenses. A rational agent would save before retirement because of the expected fall in income, and dissave after retirement, rather than the exact opposite.
Do Opioids Help Injured Workers Recover and Get Back to Work? The Impact of Opioid Prescriptions on Duration of Tem-porary Disability
Bogdan Savych, David Neumark, and Randall Lea
We estimate the effect of opioid prescriptions on the duration of temporary disability benefits among workers with work-related low back injuries. We use local opioid prescribing patterns to construct an instrumental variable that generates variation in opioid prescriptions but is arguably unrelated to injury severity or other factors affecting disability duration. Local prescribing patterns have a strong relationship with whether injured workers receive opioid prescriptions, including longer-term prescriptions. We find that more longer-term opioid prescribing leads to considerably longer duration of temporary disability, but little effect of a small number of opioid prescriptions over a short period of time.
Developing Novel Drugs
Joshua L. Krieger, Danielle Li, and Dimitris Papanikolaou
We analyze the economic tradeoffs associated with firms' decisions to invest in incremental and radical innovation, in the context of pharmaceutical research and development. We develop a new, ex ante, measure of a drug candidate's innovativeness by comparing its chemical structure to that of previously developed drug candidates: this allows us to better distinguish between novel and so-called "me-too" drugs. We show that, on average, novel drug candidates 1) generate higher private and social returns conditional on approval (as measured by revenues, stock market returns, clinical value added, and patent citations) but 2) are riskier in that they are less likely to be approved by the FDA. Using variation in the expansion of Medicare prescription drug coverage, we show that firms respond to a plausibly exogenous positive shock to their net worth by developing more chemically novel drug candidates, as opposed to more "me-too" drugs. This pattern suggests that, on the margin, firms perceive novel drugs to be more valuable ex-ante investments, but that financial frictions may hinder their willingness to invest in these riskier candidates.
Pauvreté, Egalité, Mortalité: Mortality (In)Equality in France and the United States
Janet Currie, Hannes Schwandt, and Josselin Thuilliez
We develop a method to compare levels and trends in inequality in mortality in the United States and France in a similar framework. The comparison shows that while income inequality has increased in both the United States and France, inequality in mortality in France remained remarkably low and stable. In the United States, inequality in mortality increased for older groups (especially women) while it decreased for children and young adults. These patterns highlight the fact that despite the strong cross-sectional relationship between income and health, there is no necessary connection between changes in income inequality and changes in health inequality.
Genetic Endowments and Wealth Inequality
Daniel Barth, Nicholas W. Papageorge, and Kevin Thom
We show that genetic endowments linked to educational attainment strongly and robustly predict wealth at retirement. The estimated relationship is not fully explained by flexibly controlling for education and labor income. We therefore investi-gate a host of additional mechanisms that could help to explain the gene-wealth gradient, including inheritances, mortality, savings, risk preferences, portfolio decisions, beliefs about the probabilities of macroeconomic events, and planning horizons. The associations we report provide preliminary evidence that genetic endowments related to human capital accumulation are associated with wealth not only through educational attainment and labor income, but also through a facility with complex financial decision-making. Our study illustrates how economic research seeking to understand sources of inequality can benefit from recent advances in behavioral genetics linking specific observed genetic endowments to economic outcomes.
Air Pollution and Mental Health: Evidence from China
Shuai Chen, Paulina Oliva, and Peng Zhang
A large body of literature estimates the effect of air pollution on health. However, most of these studies have focused on physical health, while the effect on mental health is limited. Using the China Family Panel Studies (CFPS) covering 12,615 urban residents during 2014-2015, we find significantly positive effect of air pollution — instrumented by thermal inversions — on mental illness. Specifically, a one-standard-deviation (18.04 μg/m3) increase in average PM2.5 concentrations in the past month increases the probability of having a score that is associated with severe mental illness by 6.67 percentage points, or 0.33 standard deviations. Based on average health expenditures associated with mental illness and rates of treatment among those with symptoms, we calculate that these effects induce a total annual cost of USD 22.88 billion in health expenditures only. This cost is on a similar scale to pollution costs stemming from mortality, labor productivity, and dementia.
Does Prenatal WIC Participation Improve Child Outcomes?
Anna V. Chorniy, Janet Currie, and Lyudmyla Sonchak
Large literatures document positive effects of WIC on birth outcomes, and separately connect health at birth and future outcomes. But little research investigates the link between prenatal WIC participation and childhood outcomes. We explore this question using a unique data set from South Carolina which links administrative birth, Medicaid, and education records. We find that relative to their siblings, prenatal WIC participants have a lower incidence of ADHD and other common childhood mental health conditions and of grade repetition. These findings demonstrate that a "WIC start" results in persistent improvements in child outcomes across a range of domains.
Childhood Health Shocks, Comparative Advantage, and Long-Term Outcomes: Evidence from the Last Danish Polio Epidemic
Miriam Gensowski, Torben Heien Nielsen, Nete Munk Nielsen, Maya Rossin-Slater, and Miriam Wüst
A large literature documents that childhood health shocks have lasting negative consequences for adult outcomes. This paper demonstrates that the adversity of childhood physical disability can be mediated by individuals' educational and occupational choices, which reflect their comparative advantage. We merge records on children hospitalized with poliomyelitis during the 1952 Danish epidemic to census and administrative data, and exploit quasi-random variation in paralysis incidence. While childhood disability increases the likelihood of early retirement and disability pension receipt at age 50, paralytic polio survivors obtain higher education and are more likely to work in white-collar and computer-demanding jobs than their non-paralytic counterparts.