On the Anatomy of Medical Progress Within an Overlapping Generations Economy

Abstract

We study medical progress within a two-sector economy of overlapping generations subject to endogenous mortality. Individuals demand health care with a view to lowering mortality over their life-cycle. We characterise the individual optimum and the general equilibrium, and study the impact of a major medical innovation leading to an improvement in the effectiveness of health care. We find that general equilibrium effects dampen strongly the increase in health care usage following medical innovation. Moreover, an increase in savings offsets the negative impact on GDP per capita of a decline in the support ratio. Finally, we show that the reallocation of resources between the final goods and health care sector, following the innovation, plays a crucial role in shaping the general equilibrium impact.

Modern Infectious Diseases: Macroeconomic Impacts and Policy Responses

“…2 The main economic effects then relate to rising health care costs, which curb the scope for investments and might lead to private or public budget deficits. Recent analysis tends to agree, however, that in rich countries the willingness to pay for health and survival is typically so high that rising health care costs are justified in social welfare terms even if they impose a drag on economic growth (Hall and Jones, 2007;Jones, 2016;Kuhn and Prettner, 2016;Frankovic and Kuhn, 2018;Fonseca et al, 2020;Frankovic et al, 2020). In high-income countries, concerns rather relate to inequality in survival and other health outcomes as documented empirically by, e.g., Chetty et al (2016) and theoretically by Frankovic and Kuhn (2019).…”

“…In typical empirical applications, this approach also does not consider general equilibrium repercussions and behavioral changes and is thus of limited use from a macroeconomic perspective. Note, however, that recent work has included the value of life in numerical general equilibrium frameworks (Hall and Jones, 2007;Frankovic and Kuhn, 2019;Frankovic et al, 2020)…”

Modern Infectious Diseases: Macroeconomic Impacts and Policy Responses

“…In typical empirical applications, this approach also does not consider general equilibrium repercussions and behavioral changes and is thus of limited use from a macroeconomic perspective. Note, however, that recent work has included the value of life in numerical general equilibrium frameworks (Hall and Jones, 2007;Frankovic and Kuhn, 2019;Frankovic et al, 2020). iiiA conceptually different approach that considers macroeconomic adjustment mechanisms is based on convergence regressions following Barro (1991) and Islam (1995).…”

Putting People Back into the Picture: Some Studies in Demographic Economics

“…The increase in labor productivity is due to capital deepening as induced by the increase in longevity (individuals save more) and the prospect for individuals to purchase higher quality health care when they are old. Overall, Frankovic et al (2020) explain that medical price inflation results from medical progress predominantly coming the terms of product innovation rather than process innovation.…”

“…Overall, the results show that reducing inefficiencies in the financial sector can be a potent lever to foster growth and fight unemployment. Frankovic et al (2020) analyze the effects of medical innovation on the demand for healthcare, consumption, the value of life, and economic growth. At the individual level, medical innovation boosts the demand for health care substantially.…”