This dissertation includes two complementary works that theoretically and empirically examine the role of health on economic development and individual health investment. Previous literature has well documented the relationship between health, health investment, and economic growth. However, most of past studies have not convincingly overcome the causality issue. This thesis is attempting to overcome the challenge by focusing on the causal effect children’s health investment on economic development, and by establishing the distinct effect of health on investment in health as well as on the natural causal effect of investment in health on health accumulation.
In the first essay, I develop a three-period overlapping generation model with endogenous longevity, fertility rate and educational investment on children to investigate the effect of health on economic development. My model suggests that health of children is a critical factor to economic development. The dynamic transition from a stagnant equilibrium to a growth equilibrium is linked by health of children and education. The model predicts that an economy with healthier children has higher educational and health investment in children and a lower fertility rate while moving towards a growth equilibrium. Using annual rainfall as an instrumental variable for health of children, the IV estimates show that the improvement of health of children under age 5 increases the 25 years forward growth rate of GDP per capita. However, the effect of life expectancy at 20 is negative. The IV estimates also indicate that the improvement of health of children increases educational investment but decreases size of population. The improvement of life expectancy at 20 only increases total population. The results show that the health at different ages have significantly different effects on economic development.
In the second essay, I examine the effect of health on individuals' health investment. Attempts to model the relationship between health and health investment has resulted in two conflicting approaches: a constant return to scale health production in Grossman model and a decreasing return to scale health production in Ehrlich-Chuma model. Although past empirical studies on health generally support Grossman model, recent empirical studies show that the correlation between health and medical care spending is negative and support the predictions of Ehrlich-Chuma model. However, these more recent studies suffer from endogeneity bias and fail to prove the causal relationship between health and health investment. This essay investigates methods to solve the endogeneity challenge. Having accounted for these factors, this paper finds that healthier people have higher total medical care spending and number of hospital stays. Moreover, health investment depends on initial health and wealth endowments. The findings are thus in favor of the predictions of Ehrlich-Chuma model.