Health, Education and Life-Cycle Savings in Different Stages of Development

Kam Ki Tang and Jie Zhang

No 606, MRG Discussion Paper Series from School of Economics, University of Queensland, Australia

Abstract: This paper studies investment in health and education in a life-cycle model. Health investment enhances survival to old age by improving health from its endowed level. The model predicts two distinctive phases of development. When income is low enough, the economy has no health investment and little savings, leading to slow growth. When income grows, health investment will become positive and the saving rate will rise, leading to higher life expectancy and faster growth. A health subsidy can move the economy from the first phase to the next. Subsidies on health and education investments can improve welfare.

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