Essays on health care reform, wealth inequality, and demography

This thesis contains three chapters. The first chapter uses a general equilibrium framework to simulate and compare the long run effects of the Patient Protection and Affordable Care Act (PPACA) and of health care costs reduction policies on macroeconomic variables, government budget, and welfare of individuals. We found that all policies were able to reduce uninsured population, with the PPACA being more effective than cost reductions. The PPACA increased public deficit mainly due to the Medicaid expansion, forcing tax hikes. On the other hand, cost reductions alleviated the fiscal burden of public insurance, reducing public deficit and taxes. Regarding welfare effects, the PPACA as a whole and cost reductions are welfare improving. High welfare gains would be achieved if the U.S. medical costs followed the same trend of OECD countries. Besides, feasible cost reductions are more welfare improving than most of the PPACA components, proving to be a good alternative. The second chapter documents that life cycle general equilibrium models with heterogeneous agents have a very hard time reproducing the American wealth distribution. A common assumption made in this literature is that all young adults enter the economy with no initial assets. In this chapter, we relax this assumption – not supported by the data – and evaluate the ability of an otherwise standard life cycle model to account for the U.S. wealth inequality. The new feature of the model is that agents enter the economy with assets drawn from an initial distribution of assets. We found that heterogeneity with respect to initial wealth is key for this class of models to replicate the data. According to our results, American inequality can be explained almost entirely by the fact that some individuals are lucky enough to be born into wealth, while others are born with few or no assets. The third chapter documents that a common assumption adopted in life cycle general equilibrium models is that the population is stable at steady state, that is, its relative age distribution becomes constant over time. An open question is whether the demographic assumptions commonly adopted in these models in fact imply that the population becomes stable. In this chapter we prove the existence of a stable population in a demographic environment where both the age-specific mortality rates and the population growth rate are constant over time, the setup commonly adopted in life cycle general equilibrium models. Hence, the stability of the population do not need to be taken as assumption in these models.

Health and development with imperfect capital markets

This paper investigates the interaction between investment in education and in life-expanding investments, in a simple two-period model in which individuaIs are liquidity constrained in the first period. We show that under low leveIs of health and capital, investments in human capital and in health are complement: since the probability of survival is small, there is littIe incentive to invest in human capital; therefore the return on health investment is also low. This reinforcing effect does not hold for higher leveIs of health or capital, and the two investments become substitute. This property has many consequences. First, subsidizing health care may have dramatically different effects on private investment in human capital, depending on the initial leveI of health and capital. Second, the assumption that mortality is endogenous induces an increase in inequality of income: since health investment is a normal good, the return on education is also lower for poor individuaIs. Third,in a non-overlapping generation madel with non-altruistic agents, the hea1th leveI of the population has strong consequences on growth. For a very low leveI of hea1th, mortality is too high for the investment on education to be profitable. For a higher, but still low, levei of hea1th the economy grows on1y if the initial stock of capital is high enough; bad health and low capital create a poverty trapo Fourth, we compare redistributive income policies versus public hea1th measures. Redistributing income reduces both static and dynamic inequality, but slows growth. In contrast, a paternalistic health policy that forces the poor to invest in hea1th reduces dynamic inequality and may foster growth.