The Medical Expansion, Life-Expectancy and Endogenous Directed Technical Change

Abstract

We build a quantitative theory of income growth, the increase in life expectancy in the last two centuries, and the emergence and expansion of a modern health sector in the 20th century. To do so, we develop a two-sector overlapping generations model with endogenous and directed technical change in which income growth, life expectancy, and technological progress in the health sector and the final goods sector, as well as the size of the health sector and the quality and price of the goods it produces are jointly deter- mined in general equilibrium. The model interprets the facts as three phases of a dynamic equilibrium in which households are initially poor and the quality-adjusted price of health goods is prohibitively high so that demand for health goods is zero, life is short and life expectancy stagnant. As income grows, fueled by technological progress, households start consuming basic health goods, life expectancy starts to rise, and directed technological progress eventually, with a delay of ca. 100 years, leads to the emergence and expansion of a modern health sector.