Health and Wealth: A Dynamic Demand for Medical Care

Abstract

We generalize extant health capital models to provide an economic explanation for why individuals invest in health when survival and/or longevity prospects are poor. We allow relative health to impact utility and model depreciation as an amount rather than a rate. As a result, the decline in health causes an inevitable disequilibrium between an increasing marginal benefit from health and a declining cost of health capital that individuals can only resolve with increasing investment in medical care. A central implication is that individuals will demand more medical care the greater their decline in health at any level of health. We develop additional testable hypotheses about what drives medical care spending.

Keywords: demand for medical care, optimal control

JEL Classification: Health