HEALTH INVESTMENT OVER THE LIFE-CYCLE

Abstract

We quantify what drives the rise in medical expenditures over the life-cycle using a stochastic dynamic overlapping generations model of health investment. Three motives for health investment are considered. First, health delivers a flow of utility each period (the consumption motive). Second, better health enables people to allocate more time to productive or pleasurable activities (the investment motive). Third, better health improves survival prospects (the survival motive). We find that, overall, the consumption motive plays a dominant role, whereas the investment motive is more important than the consumption and survival motives until the forties. The survival motive is quantitatively less important when compared to the other two motives. We also conduct a series of counter-factual policy experiments to investigate how government policies impacting health insurance coverage, Social Security, and health care technological progress affect the behavior of medical expenditures, and social welfare.