Purpose The purpose of this paper is to explore the manner in which the degree of
substitutability between public and private health expenditures contributes towards
the distribution of wealth and political economy outcomes in the long run. Design/methodology/approach
An overlapping generations model with heterogeneous agents where a person's probability
of survival into old age is determined by a variable elasticity of substitution (VES)
health production function with public and private expenditures as inputs is developed.
Public expenditure on health is determined through a political economy process. Findings
Analytical and numerical results reveal that higher substitutability between private
and public expenditures at the aggregate level and a higher share of public spending
in the production of health lead to higher long run wealth levels and lower inequality.
In the political equilibrium, higher aggregate substitutability between public and
private health expenditures is associated with more tax revenue allocated towards
public health. For most parameter combinations, the political economy and welfare
maximising proportions of tax revenue allocated towards public health care converge
in the long run.Originality/value This paper adopts an innovative approach to exploring
this issue of substitutability in health expenditures by introducing a VES health
production function. In an environment where agents have heterogeneous wealth endowments,
this specification enables a distinction to be made between substitutability of these
expenditures at the aggregate and individual levels, which introduces a rich set of
dynamics that feeds into long run outcomes and political economy results.