A Dynamic Model of Health, Education and Wealth with Credit Constraints and Rational Addiction

Using a sequential model of educational choices, we revisit the relationship between education and health. We disentangle the causal effect of education from the role played by cognitive abilities, behavioral traits and early-life health in determining adult outcomes. We show that early endowments are important determinants of adult health and success. Using models with unobservable components generated by factor structures, we compute distributions of treatment effects and allow responses to education to vary among observationally equivalent agents. We show that heterogeneity matters and that the individuals with the poorest endowment of capabilities are the ones who benefit the most from education.