Public capital, health persistence and poverty traps

Abstract

Growth dynamics and health outcomes are studied in a three-period overlapping generations model with public capital. Agents face a non-zero probability of death in adulthood. Parental health affects the health status of their children at birth, and health status in adulthood depends on health in childhood. An autonomous increase in life expectancy has an ambiguous impact on growth, because of an adverse effect on the public–private capital ratio. If life expectancy depends endogenously on health status, multiple equilibria may emerge. A reallocation of public spending toward either health or infrastructure may put the economy on a convergent path to a high-growth, high productivity steady state. However, escaping from a health-induced poverty trap can occur only if the quality of public spending is sufficiently high.