Health, social status and optimal consumption-portfolio choice

The paper introduces health into a representative agent´s preference who cares about her social status, and based on this new preference structure, we have reached a closed-form solution to the agent´s optimal consumption-portfolio question. Consistent with the expectation, the optimal ratio of the risky asset the agent holds is influenced by the covariance of the return of the risky asset and health growth rate, and the marginal propensity of consumption grows with the enhancement of expected health level and decreases with the increase of health volatility along the optimal consumption path. Besides, the model also indicates that the effect of the increase of the agent´s concern about health on marginal propensity of consumption is determined by the comparison between expected health growth and volatility. These results are helpful in explaining the consumption, saving and wealth accumulation behavior observed in China´s transitional period, and are of some value to the practice of the government´s macroeconomic policy on encouraging consumption and expanding domestic demand.