Health Heterogeneity, Portfolio Choice and Wealth Inequality

Poor health raises medical expenditures and reduces earnings, but it also limits access to high-return assets. Using PSID and HRS panel data, we document large and persistent differences in stock market participation by health status that persist within education groups and emerge in midlife, widening toward retirement. To interpret these patterns, we develop a quantitative life-cycle model with health risk, health insurance, and portfolio choice between risky and safe assets. The model highlights a health–wealth portfolio channel through which better health facilitates participation in high-return risky assets, generating return heterogeneity that compounds into large and persistent wealth gaps. Quantitatively, eliminating health-driven differences in portfolio choice reduces the top-to-median wealth gap by approximately 47 percent. Expanding public and private health insurance reduces this gap by 18–25 percent, in part by inducing greater risky-asset participation among previously uninsured households. These findings underscore the importance of health and health insurance in shaping access to high-return assets and reducing wealth inequality.