The Medical Expansion, Life Expectancy, and Endogenous Directed Technical Change

We build a unified quantitative theory of increasing adult life expectancy and income growth in the last two centuries, and the emergence of a modern health sector in the 20th century. We interpret the data as three phases of a dynamic equilibrium in which households are initially poor, the price of health goods is prohibitively high, and life expectancy is stagnant. As technological progress fuels income growth, households commence consuming basic health goods and life expectancy rises in the first half of the 19th century. 100 years later, further directed technological progress leads to the emergence of a modern health sector.
Through the lens of the model, the quality-adjusted relative price of modern health goods declined by about 2.5% per year between 1940 and 2020 while the model-implied relative price that lacks quality adjustment increases in line with the BEA health price index. Counterfactual analyses suggest that almost one fourth of adult life expectancy gains between 1940 and 2020 are attributed to the emergence and expansion of modern health and that public spending on health R&D during World War II played an important role in the kickoff of the modern health sector.