Health, Growth and Welfare: Why Put Public Money on Medical R&D?

This paper aims at providing a simple economic framework to address a somewhat neglected question of economic policy, namely the optimal share of investments in medical R&D in total public spending. In or- der to capture the long-run impact of tax-financed medical R&D on the growth rate, we develop an endogenous growth model in the spirit of Barro [1990]. The model focuses on the optimal sharing of public re- sources between consumption and (non-health) investment, medical R&D and other health expenditures. It emphasizes the key role played by the public health-related R&D in enhancing economic growth and welfare in the long run. According to our numerical simulations - based on pru- dential assumptions about the economic impact of medical R&D - a one billion euros permanent reallocation of public spending in favor of medical R&D, would induce about €4 billions GDP increase the first year and a GDP discounted benefit of about €60 billions over a decade. Then, in economies characterized by productive externalities of R&D, the govern- ment is recommended to invest substantially more in medical R&D in order to implement an optimal policy.