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The Causal Effect of the Income on Health: Evidence from German Reunification



We investigate whether there was a causal effect of income changes on the health satisfaction of East and West Germans in the years following reunification. Reunification was completely unanticipated and therefore can be seen as a 'natural experiment', which resulted in a rapid and exogenous rise in household incomes in East Germany but not in West Germany. Our data source is the German Socio-Economic Panel (SOEP) between 1984 and 2002, and we fit a new fixed-effects ordinal estimator to our health measures and develop a new causal decomposition technique to account for panel attrition. We find evidence of a significant positive effect of income changes on health satisfaction, but the quantitative size of this effect is very small. This is the case with respect to current income and a measure of 'permanent' income.

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