The economic foundation of the poor’s poor health decisions

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Rumor has it that an economist started hitting the gym after finishing two milestone research papers, in expectation of a Nobel Prize, which is only rewarded to a living person. Almost no one denies that greater expectations translate into healthier behaviors, while the converse rarely enters the health policy discussion: expectations of a less-than-desirable future may lead to unhealthy behaviors, including smoking, excessive drinking, sedentary lifestyles, and drug abuse. The health issues of the deprived may have a deeper root in economics.

Professor Zhu Xi from Shanghai Jiao Tong University and I found evidence of this in our working paper “Affordable Care Encourages Healthy Living: Theory and Evidence from China’s New Cooperative Medical Scheme”. Standard economic theory predicts that providing medical insurance encourages unhealthy behavior by mitigating economic consequences. We developed a novel theoretical framework in which the opposite is possible because insurance makes longevity more affordable and thus desirable.

We test the theory utilizing a unique experiment of China introducing the New Cooperative Medical Scheme, unique in its long-term credibility necessary for their proposed channel. This scheme reduces cigarette use by around 9% and bolsters subjective perception of the importance of physical exercise and healthy diet. These effects depend significantly on the number of children and the local culture of elderly care. We can rule out alternative explanations of these robust results. The empirical evidence affirms a causal link between concerns about negative bequest and unhealthy behavior, and how to break it.

Breaking the causal link would not be an easy task, because bringing a brighter future to the deprived would not be. But this does not revoke the necessity of considering this “expectation” mechanism in designing health policies. For example, it is trendy to study how smokers may substitute other tobacco products for cigarettes and the ensuing health consequences. According to our analytical framework, the substitution could be broader, that is, a person expecting a miserable future would consciously or unconsciously resort to other means of shortening life. Case and Deaton, in their sensational paper, pinned down drug and alcohol poisonings, suicide, and chronic liver diseases and cirrhosis as the causes of the rising mortality in midlife among white Americans. The war against tobacco use may be complicated by this potential substitution.

In general, recognizing the source of a problem is the first step in solving it. The association between income and life expectancy in the United States is well identified by a Brookings study by Bosworth and Burke and a paper by Chetty et al. The hypothesis that poverty may rationally trigger unhealthy behaviors and thus shorter life expectancy is under-explored.

Our research suggests that constructing a social safety net – by subsidizing health or old-age insurance, for example – brightens the future and thus promotes healthy living. Libertarians who believe in “from each as they choose, to each as they are chosen” may frown upon the idea of expanding the government for the sake of saving people from their own poor choices. As usual, an argument could be made that the positive externality outweighs the cost. In this case, a better social safety net can make a person more forward-looking and thus more beneficial to the society.

Discovering hidden incentives and mechanisms is one of the primal tasks of economists. Our research suggests, surprisingly, that both the Center of Disease Control and Prevention and the Department of the Treasury are important players in promoting healthy living. Let them be.