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THE FAMILY AS THE HEALTH PRODUCER

- WHEN SPOUSES ACT STRATEGICALLY

KRISTIAN BOLIN, LENA JACOBSON AND BJRN LINDGREN*

ABSTRACT
This paper extends the Grossman model to a situation in which each family member
produces own health and health of other family members. We assume that the family
members interact strategically in the production of health. Because of free-riding the
amounts of health will then be inefficiently low. This might be a rationale for public
provision of health care, both to children and to adults. Further, the models put some
doubt on the assertion that some degree of progressivity of the income tax can be
welfare improving. The reason is that an income tax decreases the value of less time
spent being sick, and hence, an income tax weakens the incentives to invest in health.
Child health is also analyzed. We examine the impact of public policy on the distribution
of health capital between the parents and the child. In particular we study the effects of
child allowances and public insurance that covers for income losses, both in the case of
child and parental illness, on the distribution of health capital. We also examine the
relation between legal institutions and economic circumstances and the level of child
health.

Keywords: Health; Human capital; Strategic spouses, Grossman model.


JEL classification: I1, I12.
Lund University, Department of Economics and Department of Community Medicine and
LUCHE (Lund University Centre for Health Economics). Address for correspondence: Email:Kristian.Bolin@nek.lu.se. Lund University, Box 7082, 220 07 Lund.
*

INTRODUCTION
In his seminal work Grossman (1972) argued that "good health" is a
commodity which is produced by the individual. The commodity "good
health" is treated as part of his or her human capital, and as such it
determines the total amount of time the individual can spend on
productive activities in market and nonmarket sectors. This provides the
rationale for the individual to demand health capital up to the point where
the costs of one additional unit of health capital is equal to the value of the
additional time available for productive use that additional unit of "good
health" creates. Grossman (1999) provides a survey of the research in this
field of economics.
Grossman's model gave many insights, but it did not take into
account that most people lead their lives within a family. The structure of
a family may change over the lifecycle, but the fact remains that other
individuals with whom a person lives influence behavior. Jacobson (1999)
and Bolin, Jacobson and Lindgren (1999) extend Grossman's model in that
they argue that the family - not the individual - produces "good health".
The most fundamental insight provided by Jacobson is that not only own
income (or wealth) can be used in the production of health, but rather that
it is the family's joint resources that are important. Jacobson's model
implies, for example, that the family will not try to equalize the health
capital of different family members. Instead, the family will allocate the
investments in health capital so that marginal benefits equals marginal net
cost of health capital. Bolin, Jacobson and Lindgren (1999) analyze a
model in which the allocation is determined by bargaining between the
spouses. The model stresses the importance of conflicting interests of
husband and wife and outside opportunities on the distribution of
investments in health capital within the family.
Even in the case where man and wife value their own health
identically and they both put the same value on the health of the spouse,
they will not in general have identical preferences regarding the
investments in health capital. That is, the husband prefers an amount of
health capital which is different from the amount that the wife prefers the

husband to hold. One reason for this might be that investments made by
one spouse in the health capital of the other spouse is an investment that
cannot be utilized by the investor in the event of the familys dissolution.
Thus, the possibility of divorce and the fact that human capital is not
shared between the spouses in case of divorce create differing incentives
between the spouses to invest in the health capital of the other spouse. 1
Jacobson (1999) as well as Bolin, Jacobson and Lindgren (1999) implicitly
assume that all decisions made by the family regarding how to allocate
time and resources will be obeyed by the individual family member. There
are, however, reasons why a Pareto efficient allocation may not be
achieved. There is, for instance, no way of writing a legally enforceable
contract concerning the time allocation of family members, i.e., there are
no ways of regulating the provision of commodities within binding
contracts. Family decision-making may be inefficient also because
commodities are non-rival and non-excludable. Further, in the face of
divorce, people may be inclined to behave strategically; the study of
strategic behavior can, hence, be motivated by the fact that many
relationships end up in divorce.
This paper develops a model in which both spouses are
strategic producers of own health as well as health of the other spouse
and child health. In the section that follows we examine the distribution of
health capital. Then follows a section in which we incorporate children into
the model. The paper is finished with an examination of the scope for
public policy and the legal institutions to be Pareto improving.

This is similar to the conclusions in, for example, Landes (1978), King (1982) and Bolin
(1994), that the possibility of divorce disturbs the investments in the human capital of
family members. Some sort of payment in case of divorce spousal support is needed
to make the investments in the spouses human capital efficient.
1

THE STRATEGIC FAMILY WITH NO CHILDREN


Each spouse, i, derives utility from his or her stock of health capital, H ti ,
as well as from the spouses stock of health capital, H t j , and a
consumption commodity, Z ti . We assume, for simplicity, that the
utility functions are time additive and strictly and jointly concave in
H t and Z t . Let our family be constituted by a husband, h, and a

wife, w, for whom utilities are


(1)

U h ( H th , H tw , Z th )

and
U w ( H tw , H th , Z tw )

(2)

We assume that the marginal utility of the consumption commodity is


increasing in good health for both spouses, i.e.,

2U
H i Z

> 0 , and that the

marginal utility of health is increasing in the health of the other spouse,


i.e.,

2U
H i H

>0,

i = h , w. We also assume that the family is formed at t = 0

and ceases to exist at t = T . For all t

between 0 and T, the family

members interact and decide how much to invest in own health and in the
health of the spouse. Since each spouse may invest in the health of the
other spouse we assume that both spouses might want to change his or
her actions, regarding investments in own health and the health of the
spouse, through time as the stocks of health capital evolve. That is, the
investments made by each spouse at each point in time is conditioned on
the health stocks that have been realized at that time, or in other words,
the gross investments, I th and I tw , are functions of both time and of the
stocks of health capital, H ti , at that time.2 We assume that these functions
are linear. The investments are partially offset by a natural depreciation
The strategies most commonly studied in differential games are open-loop and
feedback strategies. Feedback strategies are distinguished by the actions at each point in
time being a function of the state of the system at that point in time. Here, we use
feedback strategies.
2

at rates th and tw - of the existing stock of health capital. Following


Grossman (1972), Muurinen (1982), Wagstaff (1986) and Liljas (1998) we
examine a model in which the rates of depreciation are time dependent.
Thus, the equations for the motion of the stocks of health
capital over time are for the husband and the wife, respectively, with I i , j
denoting investments in the health capital of spouse i made by spouse j:
H th = I th ,h ( H th ) + I th ,w ( H th ) th H th

and
H tw = I tw, w ( H tw ) + I tw,h ( H tw ) tw H tw .

(3-4)

For each spouse the realized amount of health capital at each point in time
is determined not only by own investments but also by investments made
by the other spouse up to that point. Hence, each spouses investments in
health at each point in time are not only determined by time, but also by
all accrued investments, i.e., we assume feedback strategies. Technically,
this means that we distinguish between what is the optimal control of
health investments at the outset open-loop equilibrium and what is the
optimal control of health investments for each level of health at each point
in time feedback strategies.
The derivatives,

I i , j
H ti

, reflect how spouse j changes his/her

investments in the health capital of spouse i when the health of spouse i


changes. We assume that the marginal utility of health both of own health
and health of the spouse is diminishing, i.e., the greater amount of health
capital that is realized at time t, the smaller amounts of investments in
health will be conducted:

I ti , j
= constant < 0, i,j = h,m; I ti ,i 0 .
i
H t
We assume that marginal costs of both gross investments in health and
the consumption commodity are constant. The sum of the familys return
6

on financial capital, the spouses incomes, the cost of investments in


health capital and the cost of the consumption commodity must equal the
rate of growth of the stock of financial capital. Hence, the marginal (and
average) cost of the consumption commodity, Z , denoted ptZ , and the
marginal (and average) cost of the gross investments in health, p tI , and
earned

income

denoted

yt

must

follow

the

asset

accumulation

constraints:
W t h = rWt h + y th ( H th ) ptI ( I th ,h + I tw,h ) p tZ Z th ,

(5)

W t w = rWt w + y tw ( H tw ) ptI ( I th , w + I tw, w ) p tZ Z th ,

(6)

and

where W is total assets and r is the rate of interest. We express market


income as a function of the health stock. Remember that sick time is a
function of the health stock, and hence, we have for each spouse
y ti = ti ( ts ( H ti ) tI tZ ) , i = h , w ,

(7)

where t is the wage rate and is total time. tZ is time allocated to the
production of the consumption commodity and tI is time allocated to the
production of investments in health capital. Available time that can be
used for market work increases as the stock of health capital increases.
This is manifested through the amount of time spent at being sick being
inversely related to the stock of health capital, i.e.,

ts , i
H ti

= constant < 0 .

It is

significant to see the connection between, on the one hand, the amount of
time available in the future for allocation to the market, and, on the other
hand, health investments, H t , today, as it is this tradeoff that makes
investments in health profitable. The connection between the health stock
and earned income is

y
H ti

s
i t
t H i
t

> 0.

Further, we will only study

allocations in which each individual allocates time to the market, i.e.,


cases in which the time restriction, implicitly given by (7), is not binding.
This implies that the Lagrange mutliplier associated with this constraint is
0.
As pointed out by Grossman (1997), health capital differs from
other forms of human capital since other forms of human capital affect the
productivity (market and nonmarket), while health capital is directly
related to the total amount of time that can be used for welfare enhancing
activities. This feature of health capital is incorporated in our model.
However, since our goal is to study implications of the impact of health
being produced by strategically interactive family members, which may
induce inefficiencies, we want to make our model as simple as possible in
other regards, and hence, we do not treat the household production
functions explicitly.3 All results from the model are derived from
conditions, given by the maximum principle for optimal movements of the
state variable, H and the control variable I, which are independent of the
household production functions.
For comparison purposes we begin by deriving the conditions
for a Pareto efficient allocation.
The efficient solution to the control problem
The Pareto frontier can be traced out by maximizing the weighted, and
(1 ) , sum of lifecycle utilities: 4

Max

e {(1 )U
t

( H th , H tw , Z th ) + U w ( H tw , H th , Z tw )}dt ,

and letting go from 0 to 1. The Hamilton function for the efficient


solution to the family members allocation of resources is:5
On this point we follow Wagstaff (1986).
The conditions for a solution to the maximization problem are shown in the appendix.
The theory of dynamic optimization is mathematically well-established. For a textbook
treatment, see Chiang (1992).
5
Notice that when the efficient solution is calculated it is not necessary to distinguish
between investments in the health capital of the husband made by the wife and
i
i ,i
i, j
investments made by the husband and vice verca. We have I t = I t + I t . This is so
since we maximize the weighted sum of utilities, and hence, the origin of one particular
unit of investment does not matter.
3
4

H = (1 )U h ( H th , H tw , Z th ) + U w ( H tw , H th , Z tw )

+ Wt rWt + y tw ( H tw ) + y th ( H th ) ptI ( I th + I tw ) ptZ ( Z tw + Z th )


+

H ,h
t

(I H ) +
h
t

h
t

h
t

H ,w
t

(8)

(I H )
w
t

w
t

h
t

The optimality conditions in this case are:

( r ) t

s ,h
p tI I
1
U h
U w
h t
h
+
= ( r + t I ) pt
(1 )
t
W0
H th
H th
H th
pt

(9)

and

e ( r )t

s ,w
p tI I
1
U h
U w
w t
w
(
1

)
+

=
(
r
+

) pt (10)

t
t
W0
H tw
H tw
H tw
ptI

Some explanations are called for: W


is the costate variable connected to
t
the motion of wealth. Consequently, W
is the familys marginal utility of
0
wealth in the initial period. The left hand sides of (9) and (10) are marginal
benefits of an investment in health. The first terms on the left sides are
the marginal consumption gains from investing in health capital. The third
term on the left hand sides are the gains accruing because less time is
spent being sick. The right hand sides correspond to the net marginal
costs of an investment in health. First, we have the interest forgone of
lowering the financial holdings, rptI . Second, attached to the marginal cost
is also depreciation which occurs in every time period, and which means
that a part, t , of the investment made in health at time t depreciates at
that same point in time. Finally, since our context is dynamic, the cost of
investments is changing over time, and hence, if the price of the
investment good, I, increases over time, i.e., p tI > 0 , then the price in the
small time period, t , in which an investment takes place would increase

10

by the amount p tI t . This means that buying the investment good at time
t instead of waiting until time t + t saved p tI t .

The strategic control problem


The intertemporal problem that faces each family member is to choose the
time paths of health capital (and the consumption good) given the choices
of the other family member, so that the lifecycle utility is maximized. That
is, at each point in time, t , each spouse acts as if playing a Cournotgame.
We are now ready to formally state the maximization problem
that faces each family member. Since the planning horizon is t = T and
each family member discounts future utility at the rate , the familys
actions are the solution to the following: 6
T

max

t
h
h
w
h
e U ( H t , H t , Z t )dt
0

max

U w ( H tw , H th , Z tw ) dt

subject to:

subject to:

H th = I th ,h ( H th ) + I th ,w ( H th ) th H th

H tw = I tw,w ( H tw ) + I tw,h ( H tw ) tw H tw

H tw = I tw,w ( H tw ) + I tw,h ( H tw ) tw H tw

H th = I th ,h ( H th ) + I th ,w ( H th ) th H th

W t h = rWt h + y th ( H th )

W t w = rWt w + y tw ( H tw )

ptI ( I th ,h + I tw,h ) ptZ Z th

p tI ( I tw, w + I th , w ) ptZ Z tw

ts ,h tI ,h tZ ,h

ts , w tI , w tZ , w

H 0h = H 0h

H 0w = H 0w

H Th H min , W0 = W , WT 0

H Tw H min ,

W0 = W ,

WT 0

This model distinguishes itself from previous models of the demand for
health. The most important differences in relation to earlier models are,
first, that we allow for inefficiencies in the allocation of health investments,
and second, that we analyze two individuals with explicitly expressed

This outline of the model assumes that the spouses die at the same time t = T . The
rationale for assuming this is that we are interested in the familys decision-making and
the family stops acting as a family when one of the spouses die.
6

10

11

preferences. The spouses are connected either through consumption of


each others health, or, later, through child health.7
The optimality conditions for the spouses control problems
The solutions to the maximization problems are, again, achieved by
applying

optimal

control

theory. 8

The

Hamilton

functions

for

the

maximization problems are:


H h = e tU ( H th , H tw , Z th ) + tHhh ( I th ,h + I th ,w th H th ) + tH,hw ( I tw,w + I tw,h tw H tw )
+ Wt ,h ( rWt + y th ( H th ) ptI ( I th ,h + I tw,h ) ptZ Z th ) + h I tw,h

(11)
and
H w = e tU ( H tw , H th , Z tw ) + tHww ( I tw,w + I tw,h tw H tw ) + tHwh ( I th ,h + I th ,w th H th )
+ Wt ,w ( rWt + y tw ( H tw ) ptI ( I tw,w + I th ,w ) ptZ Z tw ) + w I th ,w ,

(12)
where the ' s are costate variables and the s are Lagrange multipliers.9
We only derive conditions for a solution in which both spouses invest in
the health capital of the other spouse, i.e., a solution where h = w = 0 The
calculations are shown in the appendix.
Given the assumption that both spouses allocate time to the
market, we achieve conditions that say that the marginal utility of an
investment in health must be equal to its marginal cost, which for the
husband takes the following form:

e ( r ) t

s ,h
I th ,w p tI I
1 U h
h t
h

=
(
r
+

) pt
t
t
W0 ,h H th
H th
H th ptI

(13)

and for wife the condition is:


There is a rather extensive literature that examines the family under the assumption
that a (large) part of what is consumed within the family are in fact public goods. For a
comprehensive discussion of this see Konrad and Lommerud (1995) and Bolin (1996).
8
We derive the feedback solution, see Kamien and Schwartz (1991).
9
Notice that the costate variables are very similar to the Lagrange variables. There are,
however, differences: the costate variables are connected to the equations of movement
of the state variable while the Lagrange multipliers are connected to the constraints.
7

11

12

e ( r ) t

s ,w
I tw,h p tI I
1 U w
w t
w

=
(
r
+

) pt
t
t
W0 ,w H tw
H tw
H tw ptI

(14)

In this case there is a cost associated with investing in health that accrues
to each spouse since health investments are partially crowded out by the
other spouse. The term

I ti , j
H ti

<0

reflects how much spouse j will

accomodate the investments in spouse is health as the health capital of


spouse i increases. Equations (13) and (14) each show some resemblance
to the conditions for optimal investments in health derived by Grossman
(1972). The difference, however, is mainly that one condition has been
replaced by two conditions, since in our case we have to choose the
optimal path for two family members rather than for one individual.
A number of propositions follow from (13) and (14). First,
regarding the strategic outcome in relation to the efficient allocation: the
strategic allocation will involve too small amounts of health capital to be
Pareto efficient. This can be seen by comparing equation (9) to equation
(13) and equation (10) to equation (14). At the left hand side of equation
(9) there is a term for the wifes utility of her husbands health capital
which is absent in equation (13). Since this term is always positive, this
tends to lower the investments in the health capital of the husband. In the
right hand side of equation (13) there is a term for the strategic interaction
between the spouses. Since this term is negative the marginal cost of an
investment in the health capital of the husband will increase, which tends
to lower the investments in the health capital of the husband. The same
argument can be applied to show that also the wife holds an inefficiently
low amount of health capital. The difference between the strategic
allocation and the efficient allocation is illustrated in figure 1 below:
Second, (13) and (14) have implications for the relation
between stocks of health capital and the consumption commodity. If we
take the ratio of (13) and (14) we obtain an expression of the relationship
between the ratio of marginal utilities and the ratio of marginal costs. It

12

13

follows immediatelly from (13) and (14) that if the spouses have identical
utility functions and identical marginal net costs their marginal utilities of
own health are equal, i.e.,

U h
H th

U w
H tw

.10 It also follows that the healthiest

spouse is also the wealthiest spouse, in terms of the consumption


commodity. The reason is as follows: Assume that one spouse is healthier
than the other spouse. Then, if the spouses are equally wealthy the
conditions (13) and (14) cannot be satisfied, since the healthiest spouses
marginal utility of increasing own health must necessarily be smaller than
the other spouses marginal utility of increasing own health. Because of
diminishing marginal utility, the healthiest spouse must also be the
wealthiest in order for (13) and (14) to be satisfied. In other words, the
healthier spouse has higher welfare than the spouse which is less healthy.
Assume that the spouses are different in one respect only: the
health capital of the husband depreciates at a higher rate than the health
capital of the wife, i.e., h > w . Then two types of allocations are consistent
with the conditons (13) and (14): either the husband is healthier than the
wife and consumes more of the consumption commodity or the wife is
healthier than the husband.
In addition to (13) and (14) there are conditions connected to
spouse is choice of the health level of spouse j (see the appendix). For the
husbands investments in the wifes health we have:

( r ) t

I tw,w p tI I
1 U h
h
= (r + t

) pt ,
W0 ,h H tw
H tw ptI

(15)

and for the wifes investments in the health of the husband we have:

e ( r ) t

I th ,h p tI I
1 U w
w
=
(
r
+

) pt .
t
W0 ,w H th
H th ptI

(16)

That is, the spouses have identical utility functions but may still prefer different
allocations and may be different in other regards. For instance, assume that the spouses
i
i
j
i
have Cobb-Douglas utilities: U = ( H t ) ( H t ) ( Z t ) , i, j = h, w . Then they would have
identical utility functions but in general prefer different allocations. Only when = they
do prefer the same allocation.
10

13

14

Combining (15) and (16) with (13) and (14) yields relationships between
the marginal rates of substitution between own health and the health of
the spouse and the ratio between marginal cost of investing in own health
to the marginal cost of investing in the health of the spouse:
s ,h
I th ,w p tI I
U h
h
h t
(
r
+

)
p
+

t
t
H th
H th ptI
H th
=
U h
I tw,w p tI I
w
(
r
+

) pt
t
H tw
H tw ptI

(17)

s ,w
I tw,h p tI I
U w
w
w t
(
r
+

)
p
+

t
t
H tw
H tw ptI
H tw
=
.
U w
I th ,h p tI I
h
(r + t
) pt
H th
H th ptI

(18)

and

The left hand sides are the marginal rates of substitution between own
health and health of the spouse. The right hand sides are the ratios
between net costs of investing in own health and the health of the spouse.
That is, for each spouse the marginal rate of substitution between own
health and health of the spouse should be equal to the ratio of the cost of
investing in own health to the cost of investing in the health of the spouse.
Notice that each spouse meets different costs. For example, the husbands
cost of investing in the health of the wife is different from the wifes cost of
investing in her own health. The explanation for this discrepancy is the
interaction effects.
Each spouse will not always invest in the health capital of the
other spouse. Whether or not the husband invests in the health of his wife
will be determined by the costs of these investments, the existing stocks
of health capital and preferences for the health of his wife in relation to his
own health. The higher the husbands wage rate, the less likely will he be
to invest in the health capital of his wife, simply because the net cost of
health capital is negatively linked to the wage rate. The significance of the
strategic effects is as follows: the more the wife accommodates her

14

15

investments in the health of her husband as the husband invests in his


own health, the more likely will he be to invest also in the health of his
wife, and the more the wife accommodates her investments in own health
as the husband invests in her health, the less likely will he be to invest
also in the health of the wife.
Assuming that each spouse has at least as strong preferences
for own health as for the health of the other spouse, and that both spouses
are equally healthy, then a necessary condition for the husband to invest
in the health of his wife is that the marginal change in net cost of own
health capital is greater than the marginal change in net cost of health
capital of the wife. Formally:
s ,h
I th , w I
I tw, w I
h t

pt +
>
pt .
H th
H th
H tw

(19)

One further observation concerns the costate variables. From the


maximum principle it follows that, for an interior solution in which both
spouses invest in the health of the other spouse: Hij = Wi p tI , for each
spouse, i, j = h, w . That is, at each point in time the life cycle utility of each
spouse from increasing own health marginally is equal to the marginal life
time utility of wealth multiplied by the price of gross health investments.
That is, the wealthier the spouse is, the higher is both own health and the
health of the spouse.
Konrad and Lommerud (1995) argue that a progressive income
tax might be Pareto improving when spouses act strategically. The
mechanism is that taxing the spouse with a comparative advantage in the
market decreases that spouses comparative advantage, which may lead
to higher contributions to the family public good. A proportional tax on the
husbands income, i.e., he keeps (1 t )h , will decrease the value of
additional health capital, as the money value of additional time at the
labor market will decrease. An income tax hence weakens the incentives
to invest in health. That is, an income tax might further increase the
inefficiency problem associated with strategic behavior and the levels of
15

16

health capital. This result is induced by the inherent difference between


health capital and other forms of human capital, i.e., that health capital
affects the time available for productive use, while other forms of human
capital affect the efficiency of a given amount of time.

THE STRATEGIC FAMILY WITH CHILDREN


We incorporate children in our model by assuming that child health is a
public good within the family and that it enters the parents utility
functions in the following way:
U ( H th , H tw , H tc , Z th )

and
U ( H tw , H th , H tc , Z tw ) .

(20-21)

The effect on the familys optimization problem is that there is one more
control variable for which to find the optimal values. To do that we need
the equation of motion for the childs (or childrens) stock of health capital.
We assume that the health capital of the child depreciates at the rate c ,
and hence
H tc = I tc , h ( H tc ) + I tc , w ( H tc ) tc H tc .

(22)

Earned income, for each spouse, i, y ti , is decided in a slightly different


way compared to the case when there are no children. The difference is
that each spouse's time that is available for market work or household
production can now be reduced also by childrens' sick time. We assume
that each spouse's nursing time is a decreasing function of child health.
The total nursing time is allocated between the spouses according to a
sharing rule,

which is settled at the outset of marrige, before the

spouses start acting as a family.11 Formally, this is expressed by


The sharing rule, , can, for example, be thought of as settled by bargaining between
the spouses over the conditions wich will govern family decisions.
11

16

17

ts ,c ,h = ts ,c ( H tc ) and ts ,c ,w = (1 ) ts ,c ( H tc ) , where ts ,c ( H tc )
ts , c
H tc

is linear, i.e.,

= constant < 0 .
The condition for a Pareto efficient allocation in this case, is

directly analogous to (9) and (10). The differences are that instead of one
term indicating the market value of less time being sick, we have two
terms according to the discussion above. We give the first order condition
without formally stating the optimization problem. Thus, in addition to (9)
and (10) the following condition is necessary for a Pareto efficient
allocation:

( r ) t

s ,c ,h
s ,c , w
p tI I
1
U h
U w
h t
h t
c
+
t
= ( r + t I ) pt
(1 )
t
W0
H tc
H tc
H tc
H tc
pt

(23)

The strategic control problems when there are children


Then, the optimization problems become:

max

t
h
w
h
e U ( H t , H t , Z t )dt
0

max

U ( H tw , H th , Z tw )dt

subject to:

subject to:

H th = I th ,h ( H th ) + I th ,w ( H th ) th H th

H tw = I tw,w ( H tw ) + I tw,h ( H tw ) tw H tw

H tw = I tw,w ( H tw ) + I tw,h ( H tw ) tw H tw

H th = I th ,h ( H th ) + I th ,w ( H th ) th H th

H tc = I tc , h ( H tc ) + I tc , w ( H tc ) tc H tc

H tc = I tc , h ( H tc ) + I tc , w ( H tc ) tc H tc

W t h = rWt h + y th ( H th )

W t w = rWt w + y tw ( H tw )

ptI ( I th ,h + I tw,h + I tc ,h ) p tZ Z th

ptI ( I th , w + I tw, w + I tc , w ) p tZ Z tw

ts ,h ts ,c ,h tI ,h tZ ,h 0

ts , w ts ,c , w tI , w tZ ,h 0

H 0h = H 0h

H 0w = H 0w

H Th H min , W0 = W , WT 0

H Tw H min , W0 = W , WT 0

The conditions previously derived, for an optimum in the absence of


children still apply to the health capital of the spouses. In the presence of

17

18

a child the optimum must obey two additional conditions regarding child
health; each parent will make strategic investments in child health. This is
similar to the conditions for the spouses to invest in the health capital of
the other spouse. The difference is that the monetary value for each
spouse of more child health capital is dependent on whom will nurse the
child in case of sickness.
In the present model we have no joint production of the
consumption commodity and the time allocated by each spouse to the
production of the consumption commodity is explicitly analyzed. This
means that if the mother has the full responsibility of nursing the child in
case of sickness, there is no incentive beyond the consumption motive
for the father to invest in child health. A model that assumes that also the
consumption commodity has public good characteristics would induce the
father to take into account the time lost for the production of this
commodity when the child is sick.
The optimality conditions for the spouses control problems
The solutions to the maximization problems are, again, achieved by
applying

optimal

control

theory.

The

Hamilton

functions

for

the

maximization problems are:


H h = e tU ( H th , H tw , Z th ) + tHhh ( I th ,h + I th ,w th H th ) + tH,hw ( I tw ,w + I tw,h tw H tw )

tH,hc ( I tc ,h + I tc ,w tc H tc ) + Wt ,h ( rWt + y th ( H th ) ptI ( I th ,h + I tw ,h + I tc ,h ) ptZ Z th ) + h I tw ,h + c ,h I tc ,h

(24)
and
H w = e tU ( H tw , H th , Z tw ) + tHww ( I tw ,w + I tw,h tw H tw ) + tHwh ( I th ,h + I th ,w th H th )

tH,wc ( I tc ,w + I tc ,h tc H tc ) + W,w
( rWt + y tw ( H tw ) ptI ( I tw,w + I th ,w + I tc ,w ) ptZ Z tw ) + w I th ,w + c ,w I tc ,w .
t

(25)
The conditions that the marginal utility of an investment in child health
must equal its cost is for the husband:

18

19
s ,c , h
I tc , w p tI I
e ( r )t U h
h t
c
t
= (r + t

) pt ,
W0 ,h H tc
H tc
H tc ptI

(26)
and for the wife:
s ,c , w
I tc ,h p tI I
e ( r )t U w
w t
c
t
= (r + t

) pt
W0 , w H tc
H tc
H tc ptI

(27)

First, notice that the parents will underinvest in child health, which can be
seen by comparing (23) to (26) or (27). The left hand side of (26) reflects
weaker preferences for child health than the right hand side of (23), as
only the benefits accruing to one spouse is present. The right hand side of
(26) indicates that the net effective marginal cost of investing in child
health is greater in the strategic case. Second, wealthier spouses invest
more in child health than those less wealthy, which can be seen from
either equation (26) or equation (27). The explanation is that more wealth
,i
for spouse i implies that W
is smaller, which makes the preferences for
0

child health, the left hand sides, stronger.


The marginal costs of an investment in child health may differ
between the spouses for primarily two reasons. First, the nursing time
might be shared unequally, and second, the strategic effects might be
asymmetric. Differences in wage rate also induce differences between the
husbands cost of investing in child health and the wifes cost of investing
in child health. The higher the wage rate, ceteris paribus, the stronger will
be the incentives for investing in child health. Also the division of nursing
time is important for the spouses incentives for investing in child health.
The incentives for investing in child health increase with the nursing time
supplied in case of sickness. If the mothers wage rate is lower than that of
the father, i.e., tw < th , an increase in the mothers share of the nursing
time, i.e., a decrease in

, will, in the new equilibrium, make the mothers

marginal utility of child health smaller and the fathers marginal utility of

19

20

child health larger. This can be seen from equation (26) and (27): a
decrease in

will decrease the second term on the left hand side, i.e.,

weaken the fathers incentive for investeing in child health. The argument
is analoguous for equation (27). Now, in what way will this affect the level
of child health? One possibility is that the mother increases her
investments in child health, and the father decreases his investments in
child health. That is, the father crowds out some (or all) of the mothers
increases in child health. From (26) and (27) it follows that a new
equilibrium in which both spouses invest in child health cannot, however,
be restored if the parents remain equally healthy as before the change.
What is the impact of an insurance that covers part of the
income losses due to sick children on the investments in child health? This
issue was also analyzed by Jacobson (1999), who argued that such an
insurance would increase the net cost of child health, since the losses from
being absent from work due to a sick child would be reduced. Hence, the
insurance would lower the (efficient) amount of child health. The present
model implies the same result.
Another public policy measure is child allowance. In Sweden,
eligibility to child allowance is not connected to the performance in the
labor market. So, it only affects the wealth of the spouses. Assume, as is
the case in Sweden, that the child allowance is paid to the mother. This
will reduce

,w
W
, which implies that the mother will increase her
0

investments in child health. However, these investments might be partially


or completely crowded out by a reduction in the fathers investments in
child health, which can be seen by examining equation (26). If the childs
stock of health capital is raised, the left hand side of (26) will be reduced.
Equilibrium, can be restored if the father reduces his investments in child
health.
The model can also be used to analyze the investments in child
health in the case when the parents are divorced. 12 Although it is more
Recently, legislation that regulates child custody in case of divorce has come into force
in Sweden. The new legislation states the childs right to both parents, and hence, favors
joint custody in the case of divorce. It is too early to say what the result regarding the
division of custody will be. However, previously the custody has in most cases been
assigned to the mother.
12

20

21

and more common that the father gets custody or at least shared custody,
it is typically the mother who has custody and the father who pays child
support. Child support is connected the total income, but is not sensitive
to the sickness of the child. In this case the Pareto optimal allocation is
given by:

e ( r ) t

1
W0

s ,c

p tI I
U h
U w
w t
c
(
1

)
+

=
(
r
+

) pt .

t
t
c
c
c
I

H
p

t
t
t
t

(28)

the optimal conditions for the strategic allocation are the same as (26) and
(27) except that the second term on the left hand side of (26) is 0, and
ts , c
H tc

ts , c , w
H tc

. The father will free-ride in the investments made in child

health by the mother since he has less intense preferences for investing in
child health. Typically, the father will not invest in child health at all, i.e.,
the marginal benefit for the father of investing in child health is smaller
than the marginal cost at all levels of health.
The new Swedish legislation, regarding child custody in case of
divorce, favors joint custody. What is the effect on child health of this rule?
Assume that joint custody implies that nursing time is shared between the
spouses, i.e., that 0 < < 1 . Compared to a situation in which either parent
enjoys separate custody, this is likely to imply greater amounts of child
health. This can be seen by examining equations (26) and (27). Start in
the state where the mother has separate custody, and move to a situation
in which the parents have joint custody. The second term of (26) will
decrease, which implies that the father has more intense incentives for
investing in child health. On the other hand, the mothers incentives for
investing in child health will be weakened. Since men on average are more
well paid than women, this shift in custody from the mother to the father is
likely to strengthen the fathers incentives for investing in child health
more than it weakens the mothers incentives.

21

22

DISCUSSION
We have proposed a basic strategic model of the demand for the
commodity good health. The model treats spouses as strategic
producers of good health. Each spouses health capital is regarded as a
public good within the family.
The main result is that the spouses will underinvest in both own
health and child health. The explanation for this is free riding and crowding
out. This distinguishes our model from the models developed by
Jacobsons (1999) and by Bolin, Jacobson and Lindgren (1999), in which
efficient allocations are examined. The focus on free-riding and crowding
out recognizes that it is not possible to sign legally binding contracts
concerning investments in health capital. We discussed the implications of
this fact on the scope for taxation and different policy measures.
The cost of taxation the deadweight loss is a core issue in
applied economic theory. The cost of taxing labor income is constituted by
its disturbing effects on the time allocation decision. Health capital puts
another dimension to this problem. Taxing labor income makes the health
capital less valuable as the value of time spent in the labor market
decreases. Hence, taxing labor income may make the inefficiency
problem, due to spouses strategic investments in each others health
capital, even worse.
Free-riding and crowding out create obstacles for policymakers.
Public policy measures, such as child allowance and insurance that covers
part of the losses which is induced by child sickness, are problematic since
they may be crowded out or weaken the incentives for investing in child
health.

22

23

APPENDIX
We derive the conditions for the strategic case without children. These
conditions can then be used as a departure for deriving the optimality
conditions for the other cases. The maximum principle gives necessary
and sufficient conditions for the optimal control of Z t , given the time path
of the state variables H t and Wt . The Lagrangians, Lh and Lw , are
Lh = e tU ( H th , H tw , Z th ) + tH ,hh ( I th ,h + I th ,w th H th ) + tH,hw ( I tw ,w + I tw,h tw H tw )
+ Wt ,h ( rWt h + y th ( H th ) ptI ( I th ,h + I tw ,h ) ptZ Z th ) + h ( ts ,h tZ ,h )
Lw = e tU ( H tw , H th , Z tw ) + tHww ( I tw,w + I tw,h tw H tw ) + tHwh ( I th ,h + I th ,w th H th )
+ Wt ,w ( rWt w + y tw ( H tw ) ptI ( I tw,w + I th ,w ) ptZ Z tw + w ( ts ,w tZ ,w )

,s are Lagrange multipliers which are to be distinguished

where the

from the costate variables.


The maximum principle yields the following equations of motion:
h
I th ,h I th , w
H h
t U
H , hh
h
tH ,hh =
=

e
+

)+
t
t
H th
H th
H th H th

W ,h
t

h,h
s ,h
ts , h
h t
I I t
(
+ pt
)+
H th
H th
H th

h
H h
I tw,w I tw,h
H ,hw
t U
H ,hw
w

t
=
= e
+ t ( t

)+
H tw
H tw
H tw H tw

W ,h
t

(A1)

h
t

s ,w
I tw,h
w t
p
+

H tw
H tw

(A2)

I
t

for the husbands health stock, and


w
I tw,w I tw,h
H w
H , ww
t U
H , ww
w

t
=
= e
+ t
( t

)+
H tw
H tw
H tw H tw

W ,w
t

w,w
s,w
ts , w
w t
I I t
(
+
p
)
+

t
H tw
H tw
H tw

(A3)

w
t

23

24
w
I th ,h I th , w
H w
H , wh
t U
H , wh
h

t
=
= e
+ t ( t

)+
H tw
H th
H tw H tw

W ,w
t

s ,h
I th , w
h t
p
+

H tw
H th

(A4)

I
t

for the wifes health stock. Since the conditions for the spouses are
directly analoguous we proceed with only the husband's condition, and
gives the conditions for efficient behavior of the wife only when necessary.
First, notice that in each equation the Lagrange multiplier is strictly
greater than zero if, and only if, the term associated with the monetary
i
value of being healthier, t

s ,i
, is zero.
H ti

In addition we have the equation of motion for total assets:


H
Wt ,h =
= Wt , h r .
Wt h
h

(A5)

Finally, we have the first order conditions for the control variables. Notice
that the control set is unconstrained, i.e., the family can actually choose
any values on I t and Z t - the limits of the budget so the solution will be
interior. (We assume that the lifecycle utility of the family is increasing in
both control variables when they are zero). The first order conditions are:
H h
= tH , hh Wt , h ptI = 0
I th ,h

(A6)
H h
= tH , hw Wt , h p tI = 0
w,h
I t

(A7)

H w
= tH , ww Wt , w ptI = 0
I tw, w

(A8)

H w
= tH , wh Wt , w p tI = 0
h,w
I t

(A9)

24

25

H h U h
=
Wt ,h ptZ = 0
h
h
Z t
Z t

(A10)
H w U w
=
Wt , w ptZ = 0
Z tw
Z tw

(A11)

To arrive at conditions, (13) and (14) in the text, start by solving the
differential equation (A5). The solution is:

Wt ,hh = W0 ,h e rt

(A5)

Next, take the total time-derivatives of (A6) (and (A7) to arrive at the
optimal condition for the husbands investments in his wifes health),
which yields:
tH ,hh = Wt ,h ptI + Wt ,h p tI

(A6)

Substitute (A6), (A5), (A6) in (A1). This yields:


First tH , hh = Wt ,h ptI + Wt , h p tI and then tH ,hh = Wt , h ptI . By plugging this into
(A1) we arrive at

I th, h I th, w
U h
W ,h I
h
Wt ,h ptI + Wt ,h p tI = e t
+

p
(

)+
t
t
t
H th
H th H th

W ,h
t

h,h
s ,h
ts ,h
h t
I I t
(
+
p
)
+

t
H th
H th
H th

(A12)

h
t

Making use of (A5) gives:

W0 ,h e rt rptI + W0 ,h e rt p tI = e t

W ,h
0

I th ,h I th , w
U h
W ,h I
h
+

p
(

)+
0
t
t
H th
H th H th

h,h
s ,h
ts ,h
h t
I I t
(
+ pt
)+
H th
H th
H th

(A13)

h
t

25

26

Rearranging yields:
s ,h
I th ,w p tI I
e ( r ) t U h
h ts ,h
h t
h

=
(
r
+

) pt
t
t
W0 ,h H th
H th Wt ,h H th
H th ptI

(A14)

The same procedure for (A2) yields:


s ,w
I tw,h p tI I
e ( r ) t U w
w ts ,w
w t
w

=
(
r
+

) pt
t
t
W0 ,w H tw
H tw Wt ,w H tw
H tw ptI

(A15)

In the case of a family with children there are additional conditions. The
maximum principle yields the following equations of motions:
h
I th ,c I tw,c
H h
t U
H , hc
h
tH ,hc =
=

e
+

)+
t
t
H tc
H tc
H th H th

W ,h
t

h ,c
s ,c , h
ts , h ,c
h t
I I t
(
+ pt
)+
H th
H th
H th

w
I tw,c I th ,c
H w
H , wc
t U
H , wc
c

t
=
= e
+ t ( t

)+
H tc
H tc
H tw H tw

W ,h
t

(A16)

h
t

w,c
s ,c , w
ts ,c , w
w t
I I t
(
+
p
)
+

t
H tc
H tw
H tw

(A17)

w
t

Additional conditions are:


H h
= tH ,hc Wt , h ptI c = 0
c
I t

(A18)
H w
= tH , wc Wt , w ptI c = 0
I tc

(A19)

26

27

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Bolin K. The Marriage Contract and Efficient Rules for Spousal Support.
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Bolin K. An Economic Analysis of Marriage and Divorce. Phd Thesis 1996.
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Bolin, K, L, Jacobsen and B, Lindgren (1999). The Family as the Producer of
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