Can Baumol's Model of Unbalanced Growth Contribute to Explaining the Secular Rise in Health Care Expenditure? An Alternative Test
AbstractIn a recent paper I argued that Baumol’s (1967) model of ‘unbalanced growth’ offers a ready explanation for the observed secular rise in health care expenditure (HCE) in rich countries (HARTWIG 2006). Baumol’s model implies that HCE is driven by wage increases in excess of productivity growth. I tested this hypothesis empirically using data from a panel of 19 OECD countries and found robust evidence in favor of Baumol’s theory. An alternative way to test Baumol’s theory is to check whether its implication that variations in the relative price of medical care contribute significantly to explaining variations in health expenditure in the same direction has an empirical grounding. Earlier studies, although mostly not in an explicit attempt to test Baumol’s theory, have occasionally rejected this hypothesis. Despite poor data quality of the available medical price indices, I perform the alternative test using data for nine OECD countries. My findings suggest that the relative price of medical care is in fact a statistically significant explanatory variable for health expenditure, thus lending support to Baumol’s theory.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by KOF Swiss Economic Institute, ETH Zurich in its series KOF Working papers with number 07-178.
Length: 24 pages
Date of creation: Nov 2007
Date of revision:
Rising health expenditure; ‘unbalanced growth’; medical care prices; OECD panel;
Other versions of this item:
- Jochen Hartwig, 2011. "Can Baumol's model of unbalanced growth contribute to explaining the secular rise in health care expenditure? An alternative test," Applied Economics, Taylor & Francis Journals, vol. 43(2), pages 173-184.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- I10 - Health, Education, and Welfare - - Health - - - General
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-11-17 (All new papers)
- NEP-HEA-2007-11-17 (Health Economics)
- NEP-MAC-2007-11-17 (Macroeconomics)
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Colombier, Carsten, 2012. "Drivers of health care expenditure: Does Baumol's cost disease loom large?," FiFo Discussion Papers - Finanzwissenschaftliche DiskussionsbeitrÃ¤ge 12-5, University of Cologne, FiFo Institute for Public Economics.
- Bates, Laurie J. & Santerre, Rexford E., 2013. "Does the U.S. health care sector suffer from Baumol's cost disease? Evidence from the 50 states," Journal of Health Economics, Elsevier, vol. 32(2), pages 386-391.
- Potrafke, Niklas, 2010.
"The growth of public health expenditures in OECD countries: do government ideology and electoral motives matter?,"
24083, University Library of Munich, Germany.
- Potrafke, Niklas, 2010. "The growth of public health expenditures in OECD countries: Do government ideology and electoral motives matter?," Journal of Health Economics, Elsevier, vol. 29(6), pages 797-810, December.
- Bates, Laurie & Santerre, Rexford, 2013. "Is the U.S. Private Education Sector Infected by Baumol’s Cost Disease? Evidence from the 50 States," MPRA Paper 52300, University Library of Munich, Germany.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.