Working Papers in Economics,
University of Gothenburg, Department of Economics

Abstract: People differ in their ability to produce health investments and in their capacity to benefit from such efforts. In this paper, we assume (1) that the individual’s health-investment production function exhibits diminishing returns to scale and (2) that the individual’s capacity to benefit from the investments is diminishing in the stock of health. Previous research has only shown the importance of the first assumption for the health-capital adjustment process. The simultaneous effects go well beyond those results, however. Thus, this paper provides an extended demand-for-health framework that distinguishes between individuals both by their capacities to benefit and by their abilities to produce,when transforming health efforts into health increments. The potential usefulness of this framework for health-policy purposes is demonstrated by solving a numerically specified version of the model, and computing individual welfare effects of medical-care goods changes.

Keywords: investments in health; diminishing returns; capacity to benefit; human capital; Grossman model

JEL-codes: I12; J24

31 pages, March 2014

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