Investment in Early Childhood Health and Its Implications For Human Capital Accumulation and Economic Growth

Abstract

Abstract This study models the role of early childhood health investments in economic growth through human capital formation in an overlapping generation model. We assume that human capital depends on health status during childhood, education investment and parental human capital. Health status during childhood in turn depends on inherited health, health investment during infancy and childhood. We solve the model under three di⁄erent modes of health nancing: initially when all the health investments are privately made by individuals. Then we solve the model under public health nancing system where government levies income tax to provide full public health care to everyone; however, the total tax income may not necessarily be spent on public health care as there is the possibility of leakage from tax collected. Furthermore, we solve the model under partial public health nancing where government provides partial public health subsidy by taxing everyone. We nd that the health investments during infancy and childhood are increasing functions of parental human capital. Higher early childhood health leads to better health status in childhood, thus higher human capital is accumulated. Comparison of public health nancing with private health nancing reveals that threshold levels of leakage from tax income determine the cases in which educational investment and population growth are going to be higher or lower. We also nd that if leakage is higher than a certain threshold level then it leads to lower growth equilibrium in public health nancing case. In the case of partial health nancing we nd that private health investments decrease with leakage and with the level of public health subsidy. For any positive leakage, health investments as well as human capital is higher in private case than in partial public health nancing. This suggests that private health nancing is the rst-best option in the presence of leakage from tax income and reducing bureaucratic ine¢ ciencies and leakage by improving institutional structure is the key to achieve better growth outcomes in public health care systems