Medical progress and life cycle choices

Abstract

In this paper, I show how medical progress, conceptualized as increasing effectiveness of health spending in reducing health deficits, affects optimal lifetime health behavior and health outcomes. To that end, I set up a stochastic life cycle model with endogenous health and longevity, calibrate it for an average American in the year 2010, and use counterfactual computational experiments to examine behavior and outcomes at lower and higher levels of medical efficacy. I begin with the standard health deficit model and the consideration of optimal health expenditure and savings. I then extend the model towards choices of occupation, unhealthy consumption, and retirement. When medical effectiveness increases by 50 percent, the benchmark American is predicted to display 23 percent fewer health deficits at age 65, retire more than 10 years later, live more than 7 years longer, and experience a 10 percent increase in the value of life at age 65. Richer and better educated individuals are predicted to benefit more from medical progress in terms of reduced morbidity and increased longevity.