Endogenous Health Care and Life Expectancy in a Neoclassical Growth Model

Abstract

We study the endogenous relationship between health care, life expectancy and output in a modified neoclassical growth model. While health care competes resources away from goods production, it prolongs life expectancy which in turn leads to higher capital accumulation. We show that savings and health care are complements in equilibrium, with both rising with economic development. Our model is therefore consistent with several stylized facts, namely, (i) countries spend more on health care as they prosper, (ii) individuals in rich countries tend to live longer, and (iii) population aging is more pronounced in rich countries. Moreover, through simulation, health care and health production technology are found to be growth and welfare enhancing.