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Dynamic panel data estimation of an integrated Grossman and Becker–Murphy model of health and addiction

Author

Listed:
  • Andrew M. Jones

    (University of York)

  • Audrey Laporte

    (University of Toronto
    University of Toronto)

  • Nigel Rice

    (University of York
    University of York)

  • Eugenio Zucchelli

    () (Lancaster University)

Abstract

We propose a dynamic panel data approach to estimate a model that integrates the Becker–Murphy theory of rational addiction with the Grossman model of health investment. We define an individual’s lifetime smoking consumption and investments in health capital as simultaneous choices within a single optimisation problem. We show that this can be estimated using GMM system estimation of two stand-alone single fourth-order difference equations of health capital and smoking. These preserve roots and fundamental dynamics of the original system of four interrelated first-order equations. Monte Carlo simulations confirm that this reduced-form dynamic estimation also produces very similar estimates to the ones of the initial system of equations. We argue that, in the presence of long panel data, this approach may provide a feasible alternative for the estimation of a complex life-cycle model of human capital.

Suggested Citation

  • Andrew M. Jones & Audrey Laporte & Nigel Rice & Eugenio Zucchelli, 2019. "Dynamic panel data estimation of an integrated Grossman and Becker–Murphy model of health and addiction," Empirical Economics, Springer, vol. 56(2), pages 703-733, February.
  • Handle: RePEc:spr:empeco:v:56:y:2019:i:2:d:10.1007_s00181-017-1367-6
    DOI: 10.1007/s00181-017-1367-6
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    Keywords

    Addiction; Health capital; Smoking; Dynamic panel data models;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • I1 - Health, Education, and Welfare - - Health

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