Health Expenditures and Inequality: A Political Economy Perspective

Abstract

We consider an overlapping generations model with heterogeneous agents where a person’s probability of survival into old age is determined by a variable elasticity of substitution health production function in which public and private expenditures are the inputs. Analytical and numerical results reveal that higher aggregate substitutability, as measured by the elasticity of substitution between private and public expenditures, leads to higher long run wealth levels and lower inequality. In the political equilibrium, higher aggregate substitutability is associated with higher public expenditure on health. We conclude that policies aimed at increasing the degree of substitutability between private and public health expenditures could yield better long run outcomes.