Scandinavian Working Papers in Economics

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

No 710: Consumption and Investment Demand when Health Evolves Stochastically

Kristian Bolin () and Michael R. Caputo ()
Additional contact information
Kristian Bolin: Department of Economics, School of Business, Economics and Law, Göteborg University, Postal: PO Box 640, SE 40530 GÖTEBORG, Sweden
Michael R. Caputo: Department of Economics University of Central Florida, Postal: P.O. Box 161400 Orlando, Florida 32816-1400

Abstract: The health capital model of Grossman (1972) is extended to account for uncertainty in the rate at which a stock of health depreciates. Two versions of the model are contemplated, one with a fully functioning financial market and the other in its absence. The comparative dynamics of the consumption and health-investment demand functions are studied in both models in a general setting, where it is shown that the key to deriving refutable results is to determine how a parameter or state variable affects the lifetime marginal utilities of health and wealth. To add further bite to the results, a stochastic control problem is solved for its feedback consumption and health-investment demand functions, thereby yielding estimable structural demand functions.

Keywords: comparative dynamics; health capital; stochastic optimal control; structural equations

JEL-codes: C61; D11; I12

24 pages, October 2017

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