Health and knowledge externalities: Implications for growth and public policy

Abstract

Interactions between knowledge and health are studied in a three-period overlapping generations model with health persistence. Agents face a non-zero probability of death in adulthood. In addition to working, adults allocate time to child rearing. Growth dynamics depend in important ways on the externalities associated with knowledge and health. Depending on the strength of these externalities, increases in government spending on education or health (financed by a cut in unproductive spending) may have ambiguous effects on growth. Trade-offs between education and health spending can be internalized by solving for the growth-maximizing expenditure allocation. With an endogenous adult survival rate, multiple growth paths may emerge. A reallocation of public spending from education to health may shift the economy from a low-growth equilibrium to a high-growth equilibrium.