Chapter 7 Demand for Health Capital

Chapter 7 Demand for Health
1. The demand for health
The investment/consumption aspects of
3. The demand for health capital
4. Changes in Equilibrium
5. Empirical Analyses
The demand for health
• Grossman (1972)
1. consumers want health, not medical care
2. The consumer as health producer
3. health capital
4. consumption good and investment good
• Figure 7-1
• Time Spend Producing Health
I=I(M, Th) (7.1)
B=B(X, TB) (7.2)
Total time=T=Th(improving health)+Tb(homr
goods)+Tl(loss to illness)+Tw(working) (7.3)
Labor-Leisure Trade-offs
• The maximum amount of time for work or leisure
T-Th-Tl=Tw+Tb (7.4)
• Figure 7.2 Labor-Leisure trade off
the slope of VS=wage rate
Indifferent Utility=U(Income, leisure time)
• Figure 7.3 In creased amount to health time due
to investment
Th increases and Tl decreases
1. shifts time-leisure line
2. higher productivity=> higher wages=> steeper
time-leisure line
The investment/consumption
aspects of health
• Dual nature of health as investment and consumption
• Production of health days (Figure 7-4)
the bowed shape=> the law of diminishing marginal
Hmin=dealth; Hmax=365
• Production of health and home good (Figure 7-5)
1.from A to C: health improvement increases home good
(health as investment good)
2. utility from Health and home good (health as
consumption good)
• The cost of capital: opportunity cost
interest cost+ depreciation cost
• Decision rule: if Rate of Return cover the cost of capital
The demand for Health capital
• Marginal Efficiency of Investment (MEI):
1.Figure 7-6 describes the pattern of rates
of return declining as the amount of
investment increases
(the production function for health days
exhibits diminishing returns)
2. the optimal demand for health
Changes in Equilibrium: Age, Wage, Education,
and Uncertainty
• Age:
1.the depreciation rates increases with age
2. optimal health stock decreases with age
3. higher depreciation rates increases the cost of
holding health capital stock
4. People will increase their gross investment in
health as they age
5. If people increases their valuation of health
days as they age, this somewhat offsets the
predicated health stock decline
• Wage rate:
1.higher wages imply a higher MEI curve=> a
higher optimal level of health stock
2. Hmin=retirement (investment version)
• Education
1. education=>efficiency in producing health=> a
higher MEI
2. the correlation of health status and education
from the supply side
3. From the demand side, educated people have
a good taste for health relative to other goods
• Uncertainty:
1. Grossman starts with assumption of
prefect certainty as to future outcome
2. Chang (1996) treats the investment in
health as a potential risky venture
(a) The first effect-the improvement of
future earnings-would shift his MEI
(b) The second effect means unless
changes occurs in productivity, increased
health investment would move down MEI
Empirical Analyses Using
Grossman’s model
• Sickles and Yazbeck (1998):health care and
leisure consumption tend to improve health.
• Gerdtham and Johannesson (1999): demand for
health increases with income and education and
decreases with age, urbanization, being
overweight, and being single.
• Crossed fields of economics