UNU-MERIT Working Papers Series
The role of consumption and the financing of health investment under epidemic shocks
Théophile T. Azomahou, Bity Diene & Luc Soete #2009-006We 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
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