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Uncertainty, the Demand for Health Care, and Precautionary Saving

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Author Info

  • Diego Nocetti

    (Clarkson University)

  • William T. Smith

    (University of Memphis)

Abstract

We analyze the demand for medical care and precautionary saving in a framework with uncertainty surrounding the incidence of illness and the effectiveness of medical treatments and a representation of preferences that disentangles ordinal preferences, risk preferences, and intertemporal smoothing preferences. We consider a “pure consumption†model with exogenous health capital and a model where young consumers invest in preventive care to increase their future health stock. In both cases, we establish conditions for the different sources for uncertainty to induce precautionary saving and we evaluate how uncertainty affects the demand of curative and preventive care. We also show that given the self-insurance function of preventive care, consumers' welfare may increase with the degree of uncertainty surrounding health care effectiveness.

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File URL: http://www.bepress.com/cgi/viewcontent.cgi?article=2626&context=bejeap
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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 10 (2010)
Issue (Month): 1 ()
Pages: 75

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Handle: RePEc:bpj:bejeap:v:10:y:2010:i:1:n:75

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Web page: http://www.degruyter.com

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Web: http://www.degruyter.com/view/j/bejeap

Related research

Keywords: health uncertainty; demand for health care; preventive care; precautionary saving; risk aversion; intertemporal substitution;

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