The Precautionary Behavior of Korean Households under Health Uncertainty

This paper tests existence of precautionary saving motive under health uncertainty, using household level panel data from Korea. For this purpose, this paper considers a dynamic health capital model with health uncertainty and derives testable equations for changes in consumption and medical expenditures. Under this framework, households who face future health uncertainty will exhibit precautionary behavior by depressing consumption or increasing investment in health. To test this hypothesis, the paper uses the conditional variance of health as the direct measure of health uncertainty, obtained by estimating a multinomial logit model. Empirical results using the Korean Household Panel Study (KHPS, 1993 - 1997) suggest that Korean elderly households follow the precautionary behavior to insure against future health risk.