The Dynamics of Living Arrangements Among the Elderly

Combining care arrangements and whom the elderly live with, I study the mechanisms behind changes in living arrangements. I estimate a dynamic model of living arrangements, savings, intergenerational transfers and health outcomes. I use the nonlinear discrete factor random effects estimation method to control for unobserved heterogeneity. I use the rich data available in the 1995 - 2006 waves of the Health and Retirement Study (HRS) and supplement them with data on Medicaid and costs of care, resulting in a unique data set. I find that living arrangements are strongly influenced by health and savings. In particular, functional health is the strongest predictor of living arrangements. Inter vivos transfers and bequest intent affect living arrangements only to the extent that they impact the distribution of unobserved heterogeneity, indicating the absence of the exchange hypothesis as far as living arrangements are concerned. Public policies have a small but significant effect in the determination of living arrangements. For example, a twofold increase in the probability of receiving nursing home benefits among Medicaid eligibles increases the use of nursing home only by a 0.1 percentage point. The effects of public policies are more pronounced among elderly individuals with poor initial health and low initial wealth.

Public health

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