Thesis advisor: Alicia H. Munnell / This dissertation contains three essays. Each considers an economic decision faced by elderly households. The cost of nursing home care represents a substantial financial risk for older households. Yet, only 10 percent purchase long-term care insurance (LTCI), with many relying on Medicaid. The first essay estimates a structural model of the LTCI purchase decision using Health and Retirement Study data. Estimates indicate that this population has a modest preference for higher quality care and thus Medicaid crowds out LTCI. In addition, housing wealth provides self-insurance against the cost of nursing home care, so that individuals who are "house-rich cash-poor" are less likely to purchase LTCI. I also evaluate public policies designed to stimulate the take-up of LTCI and reduce Medicaid spending. I find that a comprehensive 20 percent subsidy would increase take-up by 160 percent, but the resulting Medicaid savings would amount to only 22 percent of the subsidy cost. A targeted subsidy would be more likely to break even, but would have only a small effect on coverage. Full enforcement of Medicaid estate recovery programs would reduce Medicaid expenditure by 31 percent, but would have insignificant effect on LTCI coverage. The second essay investigates the impact of house prices fluctuations on the non-durable goods consumption decision of older households. House prices in the United States fluctuate over time with significant regional variation. Thus, understanding how these price movements affect households' consumption has important policy implications. Existing studies focus mostly on the working population, leaving the effect of older households, who could be either the largest beneficiaries or victims of house price fluctuations, unexamined. Using Health and Retirement Study data, I show that house price fluctuations significantly affect non-durable goods consumption of older households. Estimates indicate that both the wealth effect and a relaxed borrowing constraint increase consumption when house prices appreciate. In addition, I find that only unexpected changes in house prices lead to changes in consumption of non-credit constrained households, which is consistent with economic theory predictions. Finally, I provide evidence that older households usually fund the additional consumption by increasing mortgage debt, rather than by drawing down financial assets. The third essay evaluates the value of the additional longevity insurance acquired by delaying claiming social security benefit. Individuals can claim Social Security at any age from 62 to 70, although most claim at 62 or soon thereafter. Those who delay claiming receive increases that are approximately actuarially fair. I show that expected present value calculations substantially understate both the optimal claim age and the losses resulting from early claiming because they ignore the value of the additional longevity insurance acquired as a result of delay. Using numerical optimization techniques, I illustrate that for plausible preference parameters, the optimal age for non-liquidity constrained single individuals and married men to claim benefit is between 67 and 70. I calculate that Social Security Equivalent Income, the amount by which benefits payable at suboptimal ages must be increased so that a household is indifferent between claiming at those ages and the optimal combination of ages, can be as high as 19 percent. / Thesis (PhD) — Boston College, 2010. / Submitted to: Boston College. Graduate School of Arts and Sciences. / Discipline: Economics.

The rapid soaring housing prices in Chinese residential property market have attracted increasing worldwide attention in recent years. Facing the rising concerns about both the stability and sustainability of Chinese housing market prices dynamics, this study aims at investigating the impacts of changes in housing wealth on consumption in China. Previous studies on this subject usually use country level data with relatively shorter sample period, or individual time series for a single or a few cities. Recent development in literatures suggests that panel data have the more heightened capacity for modeling the complexity of human behavior than a single cross-section or time series data can possibly allow. In this study, in order to identify both long-term and short-term elasticity of consumption with respect to housing wealth, panel framework of ECM is constructed, with quarterly data from 23 cities throughout China, covering the period of 2005Q1-2010Q4. The estimation results confirm large and highly significant positive housing wealth effect on consumption in both long-run and short-run for China. Furthermore, due to the potential endogeneity problem driven by the fact that housing prices are highly correlated with income, instrumental variable estimations are also implemented. The resulting empirical findings confirm that changes in housing values can exert large and positive impacts on household consumption, even after this potential endogeneity bias is controlled for.

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<p>This dissertation consists of four self-contained essays.</p><p>Essay I (with Cecilia Enström Öst) investigates whether housing allowance affects recipients’ tenure choice in Sweden. A two-stage conditional maxi-mum likelihood probit (2SCMLP) model is applied in a panel data setting to simultaneously control for individual heterogeneity, state dependence and endogeneity. The empirical study is based on administrative data of housing allowance recipients between the years 1994 and 2002. Our results indicate that the housing allowance positively affects recipients’ homeownership propensity in Sweden. </p><p>Essay II investigates whether the Swedish housing allowance system creates dependence on welfare in recipients. Using longitudinal data from Swedish micro database-LINDA, this paper found that there is no evidence of nega-tive duration dependence among the Swedish housing allowance spells. This finding is consistent across different model specifications and various con-trols of the heterogeneity issue. </p><p>Essay III analyzes the impacts of the 1997 reform of Swedish housing al-lowance system on affected recipients’ exit hazards using the DD (differ-ence-in-difference) estimation strategy. This paper found strong evidence that the 1997 reform positively shifted up the conditional exiting probability of the couple with children recipient group, and the estimated magnitude of impact is sizable.</p><p>Essay IV extends the VECM (Vector Error Correction Cointegration Model) and PT (permanent-transitory) variance decomposition framework proposed by Lettau & Ludvigson (2004) to a situation in which total wealth is disag-gregated into housing wealth and financial wealth. The empirical studies are based on the Swedish aggregate quarterly data spanning from 1980q1 to 2004q4. We found strong statistical evidence that the movements of total consumption expenditures, disposable income, housing wealth and financial wealth are tied together. It is also shown that the movements of housing wealth in Sweden contain a large proportion of transitory component. </p>

This dissertation consists of four self-contained essays. Essay I (with Cecilia Enström Öst) investigates whether housing allowance affects recipients’ tenure choice in Sweden. A two-stage conditional maxi-mum likelihood probit (2SCMLP) model is applied in a panel data setting to simultaneously control for individual heterogeneity, state dependence and endogeneity. The empirical study is based on administrative data of housing allowance recipients between the years 1994 and 2002. Our results indicate that the housing allowance positively affects recipients’ homeownership propensity in Sweden. Essay II investigates whether the Swedish housing allowance system creates dependence on welfare in recipients. Using longitudinal data from Swedish micro database-LINDA, this paper found that there is no evidence of nega-tive duration dependence among the Swedish housing allowance spells. This finding is consistent across different model specifications and various con-trols of the heterogeneity issue. Essay III analyzes the impacts of the 1997 reform of Swedish housing al-lowance system on affected recipients’ exit hazards using the DD (differ-ence-in-difference) estimation strategy. This paper found strong evidence that the 1997 reform positively shifted up the conditional exiting probability of the couple with children recipient group, and the estimated magnitude of impact is sizable. Essay IV extends the VECM (Vector Error Correction Cointegration Model) and PT (permanent-transitory) variance decomposition framework proposed by Lettau &amp; Ludvigson (2004) to a situation in which total wealth is disag-gregated into housing wealth and financial wealth. The empirical studies are based on the Swedish aggregate quarterly data spanning from 1980q1 to 2004q4. We found strong statistical evidence that the movements of total consumption expenditures, disposable income, housing wealth and financial wealth are tied together. It is also shown that the movements of housing wealth in Sweden contain a large proportion of transitory component.