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A Contribution to Health-Capital Theory

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  • Titus Galama

    (University of Southern California)

Abstract

The Grossman model is the canonical theory of the demand for health and health investment. This paper provides strong support for the model’s canonical status. Yet several authors have identi?ed at least four signi?cant limitations to the literature spawned by Grossman’s seminal 1972 papers. I show that these criticisms are not the result of a ?awed model but of an unfortunate and unnecessary choice for the functional form (linear in investment) of the health-production process, and of an incorrect interpretation of the equilibrium condition for health. I ?nd that a generalized Grossman model, with decreasing returns in investment and endogenous longevity, addresses the limitations, and provides a remarkably successful foundation for understanding decisions regarding health.

Suggested Citation

  • Titus Galama, 2015. "A Contribution to Health-Capital Theory," Working Papers 2015-008, Human Capital and Economic Opportunity Working Group.
  • Handle: RePEc:hka:wpaper:2015-008
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    File URL: http://humcap.uchicago.edu/RePEc/hka/wpaper/Galama_2015_health-capital.pdf
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    References listed on IDEAS

    as
    1. (*), Nigel Rice & Paul Contoyannis, 2001. "The impact of health on wages: Evidence from the British Household Panel Survey," Empirical Economics, Springer, vol. 26(4), pages 599-622.
    2. Titus J. Galama & Hans van Kippersluis, 2010. "A Theory of Socioeconomic Disparities in Health over the Life Cycle," Tinbergen Institute Discussion Papers 10-079/3, Tinbergen Institute.
    3. Galama, Titus & Kapteyn, Arie, 2011. "Grossman’s missing health threshold," Journal of Health Economics, Elsevier, vol. 30(5), pages 1044-1056.
    4. Fonseca, Raquel & Michaud, Pierre-Carl & Kapteyn, Arie & Galama, Titus, 2013. "Accounting for the Rise of Health Spending and Longevity," IZA Discussion Papers 7622, Institute for the Study of Labor (IZA).
    5. Paul Contoyannis & Andrew M. Jones & Nigel Rice, 2004. "The dynamics of health in the British Household Panel Survey," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(4), pages 473-503.
    6. Isaac Ehrlich & Yong Yin, 2005. "Explaining Diversities in Age-Specific Life Expectancies and Values of Life Saving: A Numerical Analysis," Journal of Risk and Uncertainty, Springer, vol. 31(2), pages 129-162, September.
    7. Caputo,Michael R., 2005. "Foundations of Dynamic Economic Analysis," Cambridge Books, Cambridge University Press, number 9780521842723, April.
    8. Titus J. Galama & Patrick Hullegie & Erik Meijer & Sarah Outcault, 2012. "Is There Empirical Evidence For Decreasing Returns To Scale In A Health Capital Model?," Health Economics, John Wiley & Sons, Ltd., vol. 21(9), pages 1080-1100, September.
    9. Wolfe, John R, 1985. "A Model of Declining Health and Retirement," Journal of Political Economy, University of Chicago Press, vol. 93(6), pages 1258-1267, December.
    10. Donna B. Gilleskie, 1998. "A Dynamic Stochastic Model of Medical Care Use and Work Absence," Econometrica, Econometric Society, vol. 66(1), pages 1-46, January.
    11. repec:aph:ajpbhl:2004:94:6:1014-1018_3 is not listed on IDEAS
    12. Ehrlich, Isaac & Chuma, Hiroyuki, 1990. "A Model of the Demand for Longevity and the Value of Life Extension," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 761-782, August.
    13. Titus J. Galama & Hans van Kippersluis, 2010. "A Theory of Socioeconomic Disparities in Health over the Life Cycle," Tinbergen Institute Discussion Papers 10-079/3, Tinbergen Institute.
    14. Gerdtham, Ulf-G. & Johannesson, Magnus, 1999. "New estimates of the demand for health: results based on a categorical health measure and Swedish micro data," Social Science & Medicine, Elsevier, vol. 49(10), pages 1325-1332, November.
    15. Holger STRULIK, 2015. "A Closed-form Solution for the Health Capital Model," JODE - Journal of Demographic Economics, Cambridge University Press, vol. 81(3), pages 301-316, September.
    16. Khwaja, Ahmed, 2010. "Estimating willingness to pay for medicare using a dynamic life-cycle model of demand for health insurance," Journal of Econometrics, Elsevier, vol. 156(1), pages 130-147, May.
    17. John Karl Scholz & Ananth Seshadri, 2012. "The Interplay of Wealth, Retirement Decisions, Policy and Economic Shocks," Working Papers wp271, University of Michigan, Michigan Retirement Research Center.
    18. Galama, T. & Hullegie, P. & Meijer, E. & Outcault, S., 2012. "Empirical evidence for decreasing returns to scale in a health capital model," Health, Econometrics and Data Group (HEDG) Working Papers 12/05, HEDG, c/o Department of Economics, University of York.
    19. Julien Hugonnier & Florian Pelgrin & Pascal St-Amour, 2009. "Health and (other) Asset Holdings," Swiss Finance Institute Research Paper Series 09-18, Swiss Finance Institute.
    20. Gerdtham, U. -G. & Johannesson, M. & Lundberg, L. & Isacson, D., 1999. "The demand for health: results from new measures of health capital," European Journal of Political Economy, Elsevier, vol. 15(3), pages 501-521, September.
    21. Titus Galama & Arie Kapteyn & Raquel Fonseca & Pierre‐Carl Michaud, 2013. "A Health Production Model With Endogenous Retirement," Health Economics, John Wiley & Sons, Ltd., vol. 22(8), pages 883-902, August.
    22. Robert Kaestner, 2013. "The Grossman model after 40 years: a reply to Peter Zweifel," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 14(2), pages 357-360, April.
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    Cited by:

    1. repec:zbw:iamost:86 is not listed on IDEAS
    2. Titus J. Galama & Patrick Hullegie & Erik Meijer & Sarah Outcault, 2012. "Is There Empirical Evidence For Decreasing Returns To Scale In A Health Capital Model?," Health Economics, John Wiley & Sons, Ltd., vol. 21(9), pages 1080-1100, September.
    3. Pilar Garcia-Gomez & Titus J. Galama & Eddy van Doorslaer & Angel Lopez-Nicolas, 2017. "Interactions Between Financial Incentives and Health in the Early Retirement Decision," Tinbergen Institute Discussion Papers 17-044/V, Tinbergen Institute.
    4. Titus J. Galama & Hans van Kippersluis, 2013. "Health Inequalities through the Lens of Health Capital Theory: Issues, Solutions, and Future Directions," Tinbergen Institute Discussion Papers 13-076/V, Tinbergen Institute.
    5. van Kippersluis, Hans & Galama, Titus J., 2014. "Wealth and health behavior: Testing the concept of a health cost," European Economic Review, Elsevier, vol. 72(C), pages 197-220.
    6. repec:bla:jeurec:v:14:y:2016:i:6:p:1253-1286 is not listed on IDEAS
    7. Rachel Griffith & Rodrigo Lluberas & Melanie Lührmann, 2016. "Gluttony And Sloth? Calories, Labor Market Activity And The Rise Of Obesity," Journal of the European Economic Association, European Economic Association, vol. 14(6), pages 1253-1286, December.
    8. Titus J. Galama & Adriana Lleras-Muney & Hans van Kippersluis, 2018. "The Effect of Education on Health and Mortality: A Review of Experimental and Quasi-Experimental Evidence," NBER Working Papers 24225, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    socioeconomic status; Health; demand for health; human capital; health behavior;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • I10 - Health, Education, and Welfare - - Health - - - General
    • I12 - Health, Education, and Welfare - - Health - - - Health Behavior
    • I14 - Health, Education, and Welfare - - Health - - - Health and Inequality
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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