Optimal health investment with separable and non-separable preferences

We use a general equilibrium framework to study optimal health investment in a dynamic model where agents derive utility from consumption and health. The steady state and the dynamics of the model are studied under separable and non-separable preferences. A shock undermining health which increases health expenditure and weakens the income base, not only affects savings but also compromises the consumption capacity. The magnitude of the effects strongly depends on the preferences. The dynamics of the model includes the equilibrium dynamics and bifurcations. Simulation experiments lend additional supports to our findings in favor of the non-separable preferences.

JEL classifcation: C61; C62; I15; E21

Keywords: Consumption; health investment; preferences; dynamics; saving