Why Do Americans Spend So Much More On Health Care Than Europeans?

Empirical evidence shows that both leisure and medical care are important in maintaining health and taxation may affect the allocation of these two inputs. We highlight this point using an analytical setting whose implications conform to micro‐ and macro‐data. We then quantify these implications using a life‐cycle overlapping generations model where taxation and relative health‐care price are key determinants of the composition of the two inputs in the endogenous accumulation of health capital. We find that differences in taxation alone explain 44.7% of U.S.–EU differences in health expenditure–GDP ratio and more than 70% of their differences in time allocation.