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Why Do Americans Spend So Much More on Health Care than Europeans? (REVISED)

Author

Listed:
  • Hui He

    (International Monetary Fund)

  • Kevin X.D. Huang

    (Vanderbilt University)

  • Lei Ning

    (Shanghai University of Finance and Economics)

Abstract

Empirical evidence shows that both leisure and medical care are important for maintaining health. And taxation may affect the allocation of these two inputs. We build a life-cycle overlapping-generations model in which taxation and relative health care price are key determinants of the composition of the two inputs in the endogenous accumulation of health capital. In the model, a lower tax wedge leads to using relatively more medical care and less leisure in maintaining health, while a higher relative health care price implies an opposite substitution in quantity (away from medical care towards leisure) that weakens the direct bearing of the higher price on overall health spending. We show that differences in taxation and in relative health care price between the US and Europe can jointly account for a bulk of their differences in health expenditure- GDP ratio and in leisure time allocated for health production, with the taxation channel playing a quantitatively more significant role.

Suggested Citation

  • Hui He & Kevin X.D. Huang & Lei Ning, 2019. "Why Do Americans Spend So Much More on Health Care than Europeans? (REVISED)," Vanderbilt University Department of Economics Working Papers 19-00008, Vanderbilt University Department of Economics.
  • Handle: RePEc:van:wpaper:vuecon-sub-19-0008
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    References listed on IDEAS

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    Cited by:

    1. Hui He & Kevin X.D. Huang & Lei Ning, 2021. "Why Do Americans Spend So Much More On Health Care Than Europeans?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(4), pages 1363-1399, November.
    2. Du, You, 2023. "Health investment and medical risk: New explanations of the portfolio puzzle," Economic Modelling, Elsevier, vol. 127(C).

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    More about this item

    Keywords

    Macro-health; Taxation; Relative health care price; Health care expenditure; Time allocation; Life cycle; Overlapping generations;
    All these keywords.

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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