An Econometric Assessment of the Effect of Mental Illness on Household Spending Behavior

Abstract

This paper examines the relationship between individuals’ mental health status and their spending behavior. Compared to individuals without mental health problems, individuals with mental health problems may have higher discount rates and derive greater utility from spending (i.e., retail therapy). If the mentally ill have these characteristics, we would expect them to purchase goods and services that give immediate enjoyment, sacrificing longer-term savings goals. However, mental health disorders may result in a sense of worthlessness and lethargy such that less utility is derived from spending and less energy is available for spending, which would give us the opposite prediction. Using the Panel Study of Income Dynamics, we generally find a negative effect of mental illness on household spending, although the specific effects vary by the measure of mental illness, by the expenditure category, and by gender and couple status. Of particular concern, single and married women with mental illness reduce spending on education, which suggests a long-term financial cost of mental illness. In addition, we find some evidence of retail therapy with respect to a mental health screen for single and married women and with respect to a mental diagnosis for married men.

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