PurposeThe purpose of this paper is to explore the manner in which the degree of substitutability between public and private health expenditures contributes towards the distribution of wealth and political economy outcomes in the long run.Design/methodology/approachAn overlapping generations model with heterogeneous agents where a person’s probability of survival into old age is determined by a variable elasticity of substitution (VES) health production function with public and private expenditures as inputs is developed. Public expenditure on health is determined through a political economy process.FindingsAnalytical and numerical results reveal that higher substitutability between private and public expenditures at the aggregate level and a higher share of public spending in the production of health lead to higher long run wealth levels and lower inequality. In the political equilibrium, higher aggregate substitutability between public and private health expenditures is associated with more tax revenue allocated towards public health. For most parameter combinations, the political economy and welfare maximising proportions of tax revenue allocated towards public health care converge in the long run.Research limitations/implicationsThe paper is a theoretical investigation of how substitutability between public and private health expenditures affect transitional and long run macroeconomic outcomes. These results are amenable to further empirical investigation.Practical implicationsThe findings indicate that policies to improve institutional aspects that yield higher substitutability between public and private health expenditures and returns to public health spending could lead to better long run economic outcomes.Social implicationsThe results provide a political economy explanation for the low investments in public health care in developing countries, where aggregate substitutability between public and private health expenditures is likely to be lower. Furthermore, comparing the political economy and welfare maximising paradigms broadens the scope of the framework developed herein to provide potential explanations for cross-country differences in health outcomes.Originality/valueThis paper adopts an innovative approach to exploring this issue of substitutability in health expenditures by introducing a VES health production function. In an environment where agents have heterogeneous wealth endowments, this specification enables a distinction to be made between substitutability of these expenditures at the aggregate and individual levels, which introduces a rich set of dynamics that feeds into long run outcomes and political economy results.
Journal of Economic Studies – Emerald Publishing
Published: Aug 5, 2019