The role of consumption and the financing of health investment under epidemic shocks

We study the behavior of consumption and health investment resulting from shocks undermining health capital accumulation. We examine the effects on subsequent life cycle of long-lived shocks undermining health with either an acceleration of health capital deterioration, or a decrease in health investment efficiency. We also address the issue of the financing of health investment. We provide new evidence based on nonparametric estimations which show complex non-linear interplay between life expectancy and health expenditure. We then develop a benchmark model where consumption and health capital enter additively in the utility function, featuring independence between the returns from ordinary consumption and health. Then, we depart from this setup by assuming non-additive preferences meaning that ordinary consumption also is crucial for health. We show that a shock undermining health which increases health expenditures and weakens the income base, not only affects savings but also compromises the consumption capacity, the human and physical capital of the economy, and undercuts the process of economic development. We also show that the magnitude of the effects strongly depends on the assumed preferences.

JEL classiffcation: E21; I12; O10 Keywords: Ordinary consumption; health investment; saving; non-parametric estimation

UNU-MERIT Working Papers ISSN 1871-9872