Public-Private Mix of Health Expenditure: A Political Economy Approach and A Quantitative Exercise

This paper constructs a simple overlapping generations model to examine how the choice of public and private health expenditure is affected by preferences and economic factors under majority voting. In the model, agents with heterogeneous income decide how much to consume, save, and invest in private health care, and vote for the income tax to be used to finance public health. Agents.survival probabilities are endogenously determined by a CES composite of public and private health expenditure. For the two special cases that public and private health are complements or perfect substitutes, we show that the voting equilibrium is unique and locally stable. For the general case, we calibrate the model to Canadian data to conduct a quantitative analysis. Our results suggest that the public-private mix of health expenditure is quite sensitive to the degree of substitutability between private and public health and the relative effectiveness of public and private health. Using a sample of advanced democratic countries, we further infer these two parameters and construct the shares of public health in total health expenditure for each country, and find that the predicted values match the data quite well.