IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Income and Health Spending: Evidence from Oil Price Shocks

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

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.

If 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.

File URL:
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

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

in new window

Date of creation: Apr 2009
Date of revision:
Handle: RePEc:cpr:ceprdp:7255
Contact details of provider: Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information: Email:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth Through Creative Destruction," Scholarly Articles 12490578, Harvard University Department of Economics.
  2. repec:oup:qjecon:v:122:y:2007:i:1:p:1-37 is not listed on IDEAS
  3. repec:oup:qjecon:v:119:y:2004:i:3:p:1049-1090 is not listed on IDEAS
  4. Olivier Jean Blanchard & Lawrence F. Katz, 1992. "Regional Evolutions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(1), pages 1-76.
  5. repec:oup:qjecon:v:119:y:2004:i:2:p:527-564 is not listed on IDEAS
  6. Guy Michaels, 2011. "The Long Term Consequences of Resource‐Based Specialisation," Economic Journal, Royal Economic Society, vol. 121(551), pages 31-57, March.
  7. repec:oup:qjecon:v:122:y:2007:i:1:p:39-72 is not listed on IDEAS
  8. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
  9. Dan Black & Terra McKinnish & Seth Sanders, 2005. "The Economic Impact Of The Coal Boom And Bust," Economic Journal, Royal Economic Society, vol. 115(503), pages 449-476, 04.
  10. Gerdtham, Ulf-G. & Jonsson, Bengt, 2000. "International comparisons of health expenditure: Theory, data and econometric analysis," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 1, pages 11-53 Elsevier.
  11. Whitney K. Newey & James L. Powell & Francis Vella, 1998. "Nonparametric Estimation of Triangular Simultaneous Equations Models," Working papers 98-6, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Davis, Steven J. & Haltiwanger, John, 2001. "Sectoral job creation and destruction responses to oil price changes," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 465-512, December.
  13. David M. Cutler, 2002. "Equality, Efficiency, and Market Fundamentals: The Dynamics of International Medical-Care Reform," Journal of Economic Literature, American Economic Association, vol. 40(3), pages 881-906, September.
  14. Cutler David M. & Sheiner Louise, 1998. "Managed Care and the Growth of Medical Expenditures," Forum for Health Economics & Policy, De Gruyter, vol. 1(1), pages 1-41, January.
  15. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-51, March.
  16. Oecd, 2006. "Projecting OECD Health and Long-Term Care Expenditures: What Are the Main Drivers?," OECD Economics Department Working Papers 477, OECD Publishing.
  17. Daron Acemoglu, 2002. "Directed Technical Change," Review of Economic Studies, Oxford University Press, vol. 69(4), pages 781-809.
  18. Joseph P. Newhouse, 1992. "Medical Care Costs: How Much Welfare Loss?," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 3-21, Summer.
  19. Baker, Laurence C., 2001. "Managed care and technology adoption in health care: evidence from magnetic resonance imaging," Journal of Health Economics, Elsevier, vol. 20(3), pages 395-421, May.
  20. Kline, Patrick, 2008. "Understanding Sectoral Labor Market Dynamics: An Equilibrium Analysis of the Oil and Gas Field Services Industry," Working Papers 43, Yale University, Department of Economics.
  21. repec:oup:qjecon:v:109:y:1994:i:1:p:1-25 is not listed on IDEAS
  22. Daron Acemoglu & Amy Finkelstein, 2008. "Input and Technology Choices in Regulated Industries: Evidence from the Health Care Sector," Journal of Political Economy, University of Chicago Press, vol. 116(5), pages 837-880, October.
  23. Laurence C. Baker & Ciaran S. Phibbs, 2002. "Managed Care, Technology Adoption, and Health Care: The Adoption of Neonatal Intensive Care," RAND Journal of Economics, The RAND Corporation, vol. 33(3), pages 524-548, Autumn.
  24. Robert W. Fogel, 1999. "Catching Up with the Economy," American Economic Review, American Economic Association, vol. 89(1), pages 1-21, March.
  25. Blomqvist, A. G. & Carter, R. A. L., 1997. "Is health care really a luxury?," Journal of Health Economics, Elsevier, vol. 16(2), pages 207-229, April.
  26. Cutler, David, 2002. "Equality, Efficiency, and Market Fundamentals: The Dynamics of International Medical Care Reform," Scholarly Articles 2640584, Harvard University Department of Economics.
  27. Kevin M. Murphy & Robert H. Topel, 2006. "The Value of Health and Longevity," Journal of Political Economy, University of Chicago Press, vol. 114(5), pages 871-904, October.
  28. Fuchs, Victor R, 1996. "Economics, Values, and Health Care Reform," American Economic Review, American Economic Association, vol. 86(1), pages 1-24, March.
  29. Joseph P. Newhouse & Charles E. Phelps, 1976. "New Estimates of Price and Income Elasticities of Medical Care Services," NBER Chapters, in: The Role of Health Insurance in the Health Services Sector, pages 261-320 National Bureau of Economic Research, Inc.
  30. David M. Cutler & Louise Sheiner, 1997. "Managed Care and the Growth of Medical Expenditures," NBER Working Papers 6140, National Bureau of Economic Research, Inc.
  31. James D. Hamilton, 2008. "Understanding Crude Oil Prices," NBER Working Papers 14492, National Bureau of Economic Research, Inc.
  32. Katharine G. Abraham & John C. Haltiwanger, 1995. "Real Wages and the Business Cycle," Journal of Economic Literature, American Economic Association, vol. 33(3), pages 1215-1264, September.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:7255. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

The email address of this maintainer does not seem to be valid anymore. Please ask to update the entry or send us the correct address

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.