Modeling old-age wealth with endogenous early-life outcomes: The case of Mexico

This paper contributes to the literature on the life course and aging by examining the association between early-life outcomes and late-life well being, using data from the Mexican Health and Aging Study. Empirical research in this area has been challenged by the potential endogeneity of the early-life outcomes of interest, an issue which most studies ignore or downplay. Our contribution takes two forms: (1) we examine in detail the potential importance of two key life-cycle outcomes, age at marriage (a measure of family formation) and years of educational attainment (a measure of human capital investment) for old-age wealth, and (2) we illustrate the empirical value of past context variables that could help model the association between early-life outcomes and late-life well being. Our illustrative approach, matching macro-level historical policy and census variables to individual records to use as instruments in modeling the endogeneity of early-life behaviors, yields a statistically identified two-stage model of old-age wealth with minimum bias. We use simulations to show that the results for the model of wealth in old age are meaningfully different when comparing the approach that accounts for endogeneity with an approach that assumes exogeneity of early-life outcomes. Furthermore, our results suggest that in the Mexican case, models which ignore the potential endogeneity of early-life outcomes are likely to under-estimate the effects of such variables on old-age wealth.