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Income and Health Spending: Evidence from Oil Price Shocks

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  • Acemoglu, Daron
  • Finkelstein, Amy
  • Notowidigdo, Matthew J.

Abstract

Health expenditures as a share of GDP have more than tripled over the last half century. A common conjecture is that this is primarily a consequence of rising real per capita income, which more than doubled over the same period. We investigate this hypothesis empirically by instrumenting for local area income with time-series variation in global oil prices between 1970 and 1990 interacted with cross-sectional variation in the oil reserves across different areas of the Southern United States. This strategy enables us to capture both the partial equilibrium and the local general equilibrium effects of an increase in income on health expenditures. Our central estimate is an income elasticity of 0.7, with an elasticity of 1.1 as the upper end of the 95 percent confidence interval. Point estimates from alternative specifications fall on both sides of our central estimate, but are almost always less than 1. We also present evidence suggesting that there are unlikely to be substantial national or global general equilibrium effects of rising income on health spending, for example through induced innovation. Our overall reading of the evidence is that rising income is unlikely to be a major driver of the rising health share of GDP.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7255.

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Date of creation: Apr 2009
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Handle: RePEc:cpr:ceprdp:7255

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Keywords: health care; income; technology;

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Citations

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Cited by:
  1. Charles I. Jones, 2011. "Life and Growth," NBER Working Papers 17094, National Bureau of Economic Research, Inc.
  2. Kerwin Kofi Charles & Melvin Stephens Jr., 2013. "Employment, Wages, and Voter Turnout," American Economic Journal: Applied Economics, American Economic Association, vol. 5(4), pages 111-43, October.
  3. Andersen, Jørgen Juel, 2011. "The form of government and fiscal dynamics," European Journal of Political Economy, Elsevier, vol. 27(2), pages 297-310, June.
  4. Christine de la Maisonneuve & Joaquim Oliveira Martins, 2013. "Public Spending on Health and Long-term Care: A new set of projections," OECD Economic Policy Papers 6, OECD Publishing.
  5. Alexander James, 2013. "US State Fiscal Policy and Natural Resources," Economics Series Working Papers OxCarre Research Paper 12, University of Oxford, Department of Economics.
  6. Glazer, Jacob & McGuire, Thomas G., 2013. "Making Medicare advantage a middle-class program," Journal of Health Economics, Elsevier, vol. 32(2), pages 463-473.
  7. Anca Cotet & Kevin K. Tsui, 2010. "Resource Curse or Malthusian Trap? Evidence from Oil Discoveries and Extractions," Working Papers 201001, Ball State University, Department of Economics, revised Mar 2010.
  8. Halvor Mehlum & Ragnar Torvik & Simone Valente, 2013. "China’s Savings Multiplier," Working Papers 0013, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
  9. Shawn Kantor & Alexander Whalley, 2009. "Do Universities Generate Agglomeration Spillovers? Evidence from Endowment Value Shocks," NBER Working Papers 15299, National Bureau of Economic Research, Inc.
  10. Silvia Barbaresco & Charles J. Courtemanche & Yanling Qi, 2014. "Impacts of the Affordable Care Act Dependent Coverage Provision on Health-Related Outcomes of Young Adults," NBER Working Papers 20148, National Bureau of Economic Research, Inc.
  11. Amitabh Chandra & Jonathan Holmes & Jonathan Skinner, 2013. "Is This Time Different? The Slowdown in Healthcare Spending," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 47(2 (Fall)), pages 261-323.
  12. Andersen, Jørgen Juel & Aslaksen, Silje, 2013. "Oil and political survival," Journal of Development Economics, Elsevier, vol. 100(1), pages 89-106.
  13. Brückner, Markus & Schwandt, Hannes, 2013. "Income and Population Growth," IZA Discussion Papers 7422, Institute for the Study of Labor (IZA).

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