Nonlinear effects of government investment in education and out-of-pocket healthcare expenditure on quality of life in advanced and emerging economies

Education spending and healthcare financing are largely documented as essential drivers of human capital and social well-being. However, limited empirical evidence distinguishes the returns of government education investment and out-of-pocket healthcare expenditure on quality of life, particularly regarding potential nonlinearities, time-varying dynamics, and institutional conditioning. This study examines these dynamics using households' consumption and individuals’ life satisfaction as proxies for objective quality of life (OQL) and subjective quality of life (SQL), correspondingly. The sample comprises 20 advanced and 25 emerging economies for 2000–2023 for OQL and 2011–2023 for SQL. Applying Bayesian panel variable selection followed by Bayesian dynamic panel models with time-varying coefficients, the findings indicate optimal public education investment levels of 5.37% of GDP for SQL in advanced economies, 30.71% of GDP for SQL in emerging economies, and 7.63% of GDP for OQL in emerging economies. Likewise, optimal out-of-pocket healthcare spending levels were 24.71% of total current healthcare expenditure for the OQL model of advanced economies and 32.50% for the OQL model of emerging economies. Government effectiveness significantly strengthens welfare returns, especially for SQL, while time-varying effects remain modest. Supplementary panel smooth transition regression estimates confirm regime shifts for out-of-pocket healthcare expenditure in advanced economies, transitioning at 15.90–21.78% of current health spending for OQL and 12.43–20.29% for SQL. These findings demonstrate that effective social welfare policies should prioritize the optimal allocation rather than the maximization of fiscal resources to improve better quality-of-life for its people.