Grossmans’ model has been one of the most important …show more content…
Income Y(Ht) is assumed to be increasing in health Ht as healthy individuals are more productive and earn higher wages (Currie and Madrian, 1999; Contoyannis and Rice, 2001).Goods and services Xt purchased in the market and own time inputs τCt are used in the production of consumption Ct. Similarly medical goods and services mt and own time inputs τIt are used in the production of health investment It. The efficiencies of production are assumed to be a function of the consumer’s stock of knowledge E (an individual’s human capital exclusive of health capital [e.g. education] as the more educated may be more efficient at investing in health (Grossman 2000): It = I[mt, τIt; …show more content…
The optimal control problem presented so far is formulated for a fixed length of life T (Seierstad and Sydsaeter, 1977, 1987; Kirk, 1970). To allow for differential mortality one needs to introduce an additional condition to the optimal control problem to optimize over all possible lengths of life T (Ehrlich and Chuma, 1990). One way to achieve this is by first solving the optimal control problem conditional on length of life T ( for a fixed exogenous T), inserting the optimal solutions for consumption C∗t and health H * t (denoted by ∗) into the “indirect utility