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Consumption and investment demand when health evolves stochastically

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  • Bolin, Kristian
  • Caputo, Michael R.

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 general versions of the model are contemplated, one with a fully functioning financial market and the other in its absence. The comparative dynamics of the feedback form of the consumption and health-investment demand functions are studied in these general settings, where it is shown that the key to deriving refutable results is to determine how a parameter or state variable affects the expected lifetime marginal utilities of health and wealth. To add further reach to the results, a simplified stochastic control problem is explicitly solved, yielding estimable structural feedback demand functions.

Suggested Citation

  • Bolin, Kristian & Caputo, Michael R., 2020. "Consumption and investment demand when health evolves stochastically," Journal of Economic Dynamics and Control, Elsevier, vol. 114(C).
    • Handle: RePEc:eee:dyncon:v:114:y:2020:i:c:s0165188918302471
    DOI: 10.1016/j.jedc.2020.103893
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    Cited by:

    1. Giorgio Ferrari & Shihao Zhu, 2022. "On a Merton Problem with Irreversible Healthcare Investment," Papers 2212.05317, arXiv.org, revised Dec 2023.
    2. Ferrari, Giorgio & Zhu, Shihao, 2022. "Consumption Descision, Portfolio Choice and Healthcare Irreversible Investment," Center for Mathematical Economics Working Papers 671, Center for Mathematical Economics, Bielefeld University.

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    More about this item

    Keywords

    Comparative dynamics; Health capital; Stochastic optimal control; Structural equations;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior

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