Background
Poverty remains the worst problem in the world and anti-poverty is one of the key concerns of economists and policymakers. In 2021, it was estimated that 711 million people (i.e., about 10% of the global population) still living in extreme poverty-defined with less than $1.90 per day [
30]. Even in the United States, the most developed country in the world, 37 million people were living in poverty in 2020,
1 which represents 11% of the national population.
Many scholars have studied the causes of poverty and found the intergenerational transmission of poverty [
13,
42]. That is, poverty is transmitted from one generation to another, with poor parents having poor children, who are more likely to become poor adults themselves. However, the intergenerational transmission of poverty is affected by many factors, including family composition, parental education, parental health, productive assets, family education investment, domestic violence and other family factors, as well as non-family factors such as social network, conflict, cultural and psycho-social factors, class and caste, religion and ethnicity [
10].
Based on the family economic resource model,
2 this paper studies the intergenerational transmission of poverty and poverty alleviation, and only considers the relevant factors of normal families,
3 including family assets, education investment and parental health. Among these factors, parental education investment is assumed to be the most significant factor to affect the intergenerational transmission of poverty [
8,
9,
23]. Education develops cognitive abilities and skills that make workers more productive and richer than before and improves their socio-economic status [
1,
40]. Therefore, parental investment in their children’s education (including time and money), particularly early education, is very important to improve their children’s income in the future [
17,
45,
46]. However, children from poor families are much less likely to attend school and have difficulty obtaining high-quality education compared to those from wealthier families [
8], and then are more likely to fall into poverty [
38].
Family education investment and intergenerational transmission of economic status (poverty) have been widely and deeply studied. Becker and Tomes (1979, 1986) are pioneering articles in this area [
5,
6]. They equate human capital with an investment and study family’s investment in education and its impact on the intergenerational transmission of lifetime income and wealth in a two-period equilibrium model. Loury (1981) studies the interaction between the distribution of incomes and intergenerational transfers by assuming that parents cannot borrow to make human capital investments in their offspring, and that the random assignment of abilities to individuals by nature [
34]. Glomm and Ravikumar (1992) develop an OLG model with heterogeneous agents to study the distinction between economies with public education and those with private education, and find that income inequality declines more quickly under public education [
19]. Galor and Ziera (1993) analyze the role of wealth distribution in macroeconomics through investment in human capital and show that there are multiple steady states in an economy where credit market is imperfect and investment in human capital is indivisible [
18]. Restuccia and Urrutia (2004) provide a quantitative model to analyze the impacts of innate ability, early education, and college education on intergenerational human capital transmission, they find that approximately one-half of the intergenerational correlation in earnings is explained by parental investment in education, particularly early education [
39]. Lee and Seshadri (2019) develop a multi-period OLG model to analyze the impact of parental and individual education investment on the intergenerational transmission of economic status, and find that (early) education subsidies significantly reduce the intergenerational persistence of poverty [
31]. Caucutt and Lochner (2020) develop an intergenerational model of lifecycle human capital accumulation to study the role of early and late investments in children when credit markets are imperfect, their results show that early interventions in education tend to be more successful than later interventions in education in improving human capital outcomes [
12].
However, the literature above does not consider parental health risks when studying family education investment and intergenerational transfer of poverty. Parental health status is another key factor in affecting intergenerational transmission of poverty [
10]. Parental good health is a key asset and health shocks have been identified as a key driver of downward mobility due to the lost labor income and the costs of seeking treatment [
24]. Parental poor health has strong and long-lasting effects on the economic well-being of children in families experiencing downward socioeconomic mobility and increases their exposure to poverty [
48]. Due to potential health risks and lack of health insurance system, the poor may change economic behaviors, such as reducing investment in children’s education [
14]. This paper contributes to the area of family education investment and the intergenerational transmission of poverty by considering parental health risks, that is, parents may lose their labor income and have to pay medical expenses due to a health shock in the life cycle.
Moreover, all the studies mentioned above assume that households’ income is determined once their human capital is determined and households cannot earn more money in any way. But in fact, households could make more money by working overtime and engaging in dangerous work [
20,
26]. Meanwhile, working overtime often increases health risks [
11,
16,
44,
47]. Another contribution of this study is that it allows parents to earn more money at the price of a physical overdraft and higher health risk.
This study is motivated by the following questions. Given that investments in education reduce the intergenerational transmission of poverty [
12,
31,
39], will parents overdraw their bodies to get more income to invest in children’s education to help them escape the poverty trap? If physical overdraft means higher health risks in the future, how will parents’ decisions on physical overdraft and education investment change? Furthermore, how will physical overdraft affect the intergenerational transmission of poverty? As a tool to manage health risks, what is the role of health insurance arrangements in poverty alleviation?
4
We have three major assumptions in this study. Firstly, heterogeneous households have different human capitals, which are determined by their parents’ human capitals and education investment. This assumption is the same as in many literature, such as [
12,
19,
31,
39].
Secondly, heterogeneous households own the same physical endowment. That is, although the cognitive abilities and skills may be different, each household owns a healthy body in adulthood. Lack of food, clean water and malnutrition may cause the poor to die early or become weak and ill in adulthood [
24]. Such households and their offspring may be destined to continue to struggle in the poverty trap. But in general, most households will survive with a healthy body in their 20s. Consequently, this paper takes healthy households as the research object.
Thirdly, and most importantly, households can overdraw their bodies to obtain more income, but the more serious the physical overdraft are, the greater the health risk in the future. Overdraft mentioned in this paper includes working overtime, hard work, poor working environment, engaging in dangerous work, and so on. Households could earn more money by overdrawing their bodies [
20,
26]. However, physical overdraft and health risk are strongly correlated. Due to the low cognitive abilities and skills, the poor are likely to engage in informal and precarious employments in order to sustain their necessities [
3,
26]. Informality usually means physical overdraft because of its unregulated and unregistered characteristics [
35], and is highly correlated with poor health [
2,
41]. Even if informal employment is not involved, working overtime often increases health risks [
11,
16,
44,
47].
Following [
12,
31], this paper develops a four-period overlapping generation model with the above three assumptions. In our model, households in their childhood make no decisions and are raised/educated by their parent; young households bear children and make decisions of physical overdraft, investments in their children’s human capital and savings; households are exposed to health risks in middle age and make consumption and savings decisions; and old households consume all their savings and the remaining physical endowments and die.
Following the same numerical method as [
31], this paper analyzes the impacts of health risk on education investment, intergenerational transmission of poverty and economic growth in equilibrium, and discusses the roles of health insurance in poverty alleviation. Our results show that all households will escape the poverty trap in an economy where physical overdraft increases income without risk to health. However, in an economy where health risk is correlated with physical overdraft, physical overdraft will increase health risk and change households’ behaviors, so some households will fall into the poverty trap. In this case, health insurance arrangement can lift some or even all poor households out of poverty by alleviating the negative impact of health risk on the economy.
The remainder of this paper is organized as follows. Section 2 presents our model, and Section 3 calibrates our model parameters and show our main results. This includes parental overdraft decisions with and without health risk and the poverty in the steady states, as well as the role of health insurance in anti-poverty and economic growth. Section 4 concludes.
Conclusion
This study formulates an economic development model of endogenous health risks and poverty based on a four-period OLG model and investigates the impact of health risk on education investment, intergenerational transmission of poverty and economic growth. In addition, the roles of health insurance in poverty alleviation are analyzed by introducing mutual health insurance mechanisms in this framework. This study is a development upon [
12,
31]. Its main contribution is that it endogenizes health risks by assuming that households make the overdrawing decision and then an economic development model of endogenous health risks and poverty is constructed to discuss the effects of health risk and health insurance on the economy and poverty.
Our results show that: Firstly, health risks are the main cause of the poverty trap under the constraint of minimum consumption. Compared with a health-risk-free economy, health risks reduce total capital, total labor, and capital per capita. Based on this result, it can be learnt that the poor will escape the poverty trap through physical overdraft if there is no health risk or the relevant health risks are covered free of charge by health insurance.
In addition, the health insurance mechanism established in this study mitigates, but does not entirely eliminate, the adverse effects of health risks on the economy. Plan A helps a portion of the population below the poverty threshold (14.12% of the poor) escape poverty and is a Pareto improvement. Plan B helps all households below the poverty threshold escape poverty and increases the total social welfare based on the welfare loss of the wealthy. The result means that a health insurance system that covers the poor and has a certain redistributive character can contribute to poverty reduction, and Plan B is such a system.
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