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Optimal health investment and preference structure

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  • Théophile Azomahou

    ()

  • Bity Diene

    ()

  • Mbaye Diene

    ()

  • Luc Soete

    ()

Abstract

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 the wage 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. Copyright The Author(s) 2015

Suggested Citation

  • Théophile Azomahou & Bity Diene & Mbaye Diene & Luc Soete, 2015. "Optimal health investment and preference structure," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 60(3), pages 521-565, November.
  • Handle: RePEc:spr:joecth:v:60:y:2015:i:3:p:521-565
    DOI: 10.1007/s00199-015-0896-5
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    References listed on IDEAS

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    More about this item

    Keywords

    Consumption; Health investment; Wage; Longevity; Opportunity costs; C61; C62; I15; E21;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • I15 - Health, Education, and Welfare - - Health - - - Health and Economic Development
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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