Health-conscious consumer behavior

Abstract

This paper presents a model of health-conscious consumer behavior under the assumption that health, produced by consumption, enters the utility function and affects simultaneously the income earning capacity of the consumer through its impact on the efficiency of work performance, hence the budget constraint. We demonstrate that the optimization requires that the total marginal utility of a good, arising partly from the good itself and partly from an induced gain of health, equal the implicit utility value of its effective price, which is calculated from the market price by adjusting it for an incremental income due to an induced gain in health. This explains why health-enhancing goods are treated favorably and health-harming ones are avoided as well as why the knowhow regarding how to produce and maintain health affects consumer choice. We offer new interpretations of the Slutsky Equation and Shephard’s Lemma in relation to the Hicks–Samuelson theory as the reference model. Both static and dynamic cases are analyzed with or without leisure, to elucidate the exact working of the equi-marginal principle in each case and to draw implications on several theories including the permanent income hypothesis and the efficiency wage hypothesis.