Optimal health investment and preference structure

Théophile Azomahou (1) , Bity Diene (2) , Mbaye Diene (3) , Luc Soete (4)

1 CERDI - Centre d'Études et de Recherches sur le Développement International
2 CERDI - Centre d'Études et de Recherches sur le Développement International
3 CRES - Consortium pour la Recherche Economique et Sociale
4 UNU-MERIT - United Nations University

This paper develops a general equilibrium framework to study the role of preference structure (additive, multiplicative and a convex combination of the two) in connecting consumption, health investment, stock of health and capital, and their effects on the wage rate and on productivity. We show that the elasticities of health production, health investment and health cost determine jointly how health influences thewage rate.We examine the steady state and the equilibrium dynamics of the model. In the case of additive preferences, the existence of equilibrium and the stability of the dynamic system require that the ratio of the elasticities of the cost of health and health investment is greater than the elasticity of the production function of health. Health stock can have either positive or negative effects on wages via a mechanism of reservation wages.When preferences are multiplicative, the condition of the existence of equilibrium and the stability of the dynamic system reverse, and the effect of health stock on wages is always positive. Longevity is a decreasing convex–concave function of the elasticity of inter-temporal substitution of health. We also compare the relative behavior of opportunity costs of health under preference structure.

Mots clés: Consumption · Health investment · Wage · Longevity · Opportunity costs

Domaines: Economies et finances

Théophile Azomahou, Bity Diene, Mbaye Diene, Luc Soete. Optimal health investment and preference structure. Economic Theory, 2015, 60 (3), pp.521-565. ⟨10.1007/s00199-015-0896-5⟩. ⟨halshs-01228716⟩