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

This paper introduces unfunded pay-as-you-go public pensions in a two-period overlapping generations model with endogenous lifetime à la Chakraborty (2004). We study the transitional dynamics and steady states outcomes 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 economies. Moreover, under myopic expectations, the government health expenditure can generate non-monotonic fluctuations in low mortality societies.