Medical innovation, life expectancy, and economic growth

Despite an increasing recognition of the importance of health for economic growth, there is still a lack of understanding of the role of medical innovation in this process. Specifically, what are the causal effects of medical innovation on economic growth and which non-linearities matter in this context? To answer these questions, we propose an R\&D-based economic growth model with overlapping generations in which life expectancy depends on health care utilization per capita and on medical innovation and test the model's implications empirically. We show that a causal pathway from medical innovation to economic growth prevails with life expectancy being an important transmission mechanism. Non-linearities matter in the following way: in early stages of development, medical innovation does not have a positive effect on economic growth, whereas in intermediate stages, a positive and significant effect emerges. In late stages of development, when life expectancy is already very high, the effect becomes weaker and potentially negative because health improvements are increasingly difficult to achieve and become ever more resource intensive.