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 economy with endogenous lifetime a' 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 nonmonotonic fluctuations in low mortality societies.