Luciano Fanti, Luca Gori

Public Health Spending and Unfunded Public Pensions in an OLG Model of Neoclassical Growth: Some New Results About the Poverty Trap Problem

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Keywords: health, OLG model, public pensions, C62, I18, J1, O4.

This paper introduces unfunded pay-as-you-go public pensions in a two-period overlapping generations economy with endogenous lifetime à la Chakraborty (2004). We study the transitional dynamics and steady states outcomes of the economy, showing that the public provision of health services may have not only the well-known beneficial effect to help to escape from poverty, but it can also produce unexpected negative consequences for per capita GDP in both low-income-high-mortality and high-income-low-mortality societies. Moreover, under myopic expectations, the government health expenditure can generate non-monotonic fluctuations in low mortality societies.

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