Freiberger, Kuhn and Wrzazcek started their work on health shocks within the FWF project “Life-cycle behaviour in the face of large shocks to health” (P 30665-G27). This work focuses on the modelling of large shocks to individual health over the life-cycle.

Optimal consumption before and after cancer diagnosis © Freiberger

Optimal consumption before and after cancer diagnosis for all possible ages at diagnosis

Most models on the life-cycle utilization of health care consider the expected development of an individuals health. However, health shocks with significant impact (e.g. the onset of a chronic disease or life-threatening accidents) should not be averaged into a mean value, as they can put the life-course onto a different trajectory. This paper presents a dynamic optimal control framework incorporating a stochastic health shock with individuals allocating their resources to consumption and various types of health care over their life-cycle. We distinguish between general health care and shock specific prevention, acute and chronic care. We investigate the optimal decisions (with respect to consumption, savings and health care) made in anticipation of a potential health shock and the optimal reaction to all possible shock scenarios. Furthermore, we extend the value of life concept to other aspects of individual health and illustrate our findings by calculating a numerical solution calibrated to an individual facing a potential cancer diagnosis in the US. For the numerical solution, we use the 2SOCS model, which allows for an efficient solution of two-stage optimal control problem with random switching time.

Working Paper

Freiberger, M., Kuhn, M., & Wrzaczek, S. (2023). Modeling health shocks. IIASA Working Paper. Laxenburg, Austria: WP-23-002