Grossman model

Health as a Human Capital : Overview of Grossman Model

Prepared by – Sumit Kumar Das

CONTENT Section I : Education, Field of Work and Major Contribution in Health Economics by Michael Grossman

Section II : Concept on “Health as a Human Capital”

Section III : Outline of the Model – Assumptions, Functions & Equilibrium Conditions

Section IV : Application of the Model

Section I : Education, Field of Work and major contribution in health economics by Michael Grossman

Profile • Michael Grossman is an American health economist and

economics professor, was born in 1942. • He received his doctorate degree from Columbia University

1970. • He earned his professorship in 1978 and in 1988 he became

Distinguished Professor of Economics.

Field of Research• Distinguished Professor Michael Grossman serves on the

doctoral faculty in economics and as Health Economics Program director, research associate at the National Bureau of Economic Research.

• He has many publications apart from Health Economics like Agricultural Economics, Corporate Finance, Demographic Economics, Environmental Economics, Management, Insurance Economics, Law & Economics and so on.

Main Contribution in Health Economics and Modelling

• His main contribution in health economics is the demand-for-health model (Grossman model, or the health-production model).

• His research has focused on economic models of the determinants of health and the economics of substance use and abuse.

• His 1972 monograph introduced the concept of the individual as producer of his or her own health.

• It was a major achievement and a seminal contribution to economic theory. The “Grossman model” has been extremely influential on the development of health economics.

Contd …• His recently completed studies deal with the economics of

obesity, and the effects of parents’ schooling and the introduction of national health insurance on child health in Taiwan.

• His current research deals with the determinants of childhood obesity, the effects of insurance and quality on hospital prices for cancer surgery, neuroeconomics and alcohol control policies.

• He also focused on the economic models of the determinants of adult, child, and infant health in the U.S.

Section II : Concept on “Health as a Human Capital”

Concept• Poor countries tend to be unhealthy, and unhealthy countries

tend to be poor. • Improvements in income have come hand-in-hand with

improvements in health.• The human capital model of the demand for health, was

developed in 1972 by Michael Grossman• The model views health as a durable capital stock that yields

an output of healthy time. • Since health capital is one component of human capital, a

person inherits an initial stock of health that depreciates with age and can be increased by investment.

• Death occurs when the stock falls below a certain level.

Human Capital Theory???

• The approach to the demand for health has been labelled as the human capital model because it draws heavily on human capital theory [Becker (1967), Ben-Porath (1967)].

• According to human capital theory, increases in a person's stock of knowledge or human capital raise his productivity in the market sector of the economy, where he produces money earnings, and in the nonmarket or household sector, where he produces commodities that enter his utility function.

Contd…• If increases in the stock of health simply increased wage rates,

one could simply have applied Becker's and Ben-Porath's models to study the decision to invest in health.

• However, that health capital differs from other forms of human capital.

• In particular, Grossman argued that a person's stock of knowledge affects his market and nonmarket productivity, while his stock of health determines the total amount of time he can spend producing money earnings and commodities.

Why Demand for Health?• In his model, health - defined broadly to include longevity and

illness-free days in a given year - is both demanded and produced by consumers.

• health is demanded by consumers for two reasons.

As a consumption commodity - it directly enters their preference functions, or, put differently, sick days are a source of disutility.

As an investment commodity - it determines the total amount of time available for market and nonmarket activities. In other words, an increase in the stock of health reduces the amount of time lost from these activities, and the monetary value of this reduction is an index of the return to an investment in health

• one of the novel features of the model is that individuals"choose" their length of life. Gross investments are produced by household production functions that relate an output of health to such choice variables or health inputs as medical care utilization, diet, exercise, cigarette smoking, and alcohol consumption.

Section III : Outline of the Model – Assumptions, Functions & Equilibrium Conditions

Basic ModelLet the intertemporal utility function of a typical consumer be

0H inherited stock of health (given at i=0 )

iH stock of health in time period i (endogenous)

i service flow per unit stock

iii Hh total consumption of “health services”

iZ consumption of another commodity (aggregate of all commodities besides health)

Assumptions :

(1) The length of life as of the planning date (n) is fixed – endogenous (2) Death takes place when minHH i

Net investment in the stock of health:

iIi

goods purchased in the market that contribute to gross investment in health (Medical care)

iM

Consumers produce gross investment in health and other commodities in the utility function according to a set of household production functions :

rate of depreciation during the ith period (exogenous but vary with the age of the individual)

10 i

iX

gross investment in the stock of health

goods input in the production of the commodity iZ

iiandTTH time inputs

iE consumer’s stock of knowledge or human capital (exogenous) Assumptions :(1) Increase in knowledge capital raises the efficiency of the production process in the

nonmarket or household sector (2) Production functions are linear homogeneous in the endogenous market goods & time inputs

Goods Budget Constraint:

(4)

Present value of outlays on

goods

Present value of earnings

income over the life cycle

Initial Assets(discounted

property income)

iiandVP Prices of iiandXMiW Hourly wage rate

iTW Hours of workr Market rate of interest

Time Budget Constraint:(5)

iTL Time lost from market & nonmarket activities due to illness & injury Total amount of time available in any period (measured in hours)

Assumption :(1) Sick time is inversely related to the stock of health i.e. 0

i

i

HTL

Full Wealth Constraint: Using (4) & (5)

(6)

Full WealthDiscounted value of

the earnings an individual would

obtain if he spent all of his time at work

Initial Assets(discounted

property income)

Market Goods

Nonmarket Production

Lost due to

illness

Spent

The equilibrium quantities of Hi and Zi can be found by

Maximizing Utility function

Subjects to the constraints given by equations (2), (3) & (6)

Inherited stock of health Optimal quantities

of gross investment in health Rate of

depreciation

Optimal quantities of health capital

Section IV : Application of the Model

• After the articulation of Grossman model demand for health care, it has been predominantly monopolizing the area of research in the realm of Health Economics.

• Number of Papers has been published, some are supporting and some are disproving.

• Classified into two domainPaper based on cross-sectional dataPaper based on Longitudinal data

Research Proving the Model

• Leu & Doppmann (1986) and Leu & Gern (1992) confirm a decrease of health capital with age.

• Strauss et al. (1993) found that health based on activity limitation decreases with age and higher education leads to improved health.

Research Proving the Model

• On 1999, Ulf G-Gerdtham and Magnus Johannesson showed that demand for health increases with income, education and decreases with age, overweight, Urbanization and being single. They had used Swedish micro data.

• Sickles & Yazbeck (1998) showed that health care and leisure consumption tend to improve health.

Research Disproving the Model

• In respect to health Wagstaff (1986) and Leu & Gerfin found a negative correlation between demand for medical services for health.

• In respect to age Duan et al. 1984, Newhouse & Phelps 1974, Zweifel 1985 rejected empirically the prediction that demand for health services increases with age

• In context of education wagstaff (1986) found a positive correlation between education and the demand for medical services.

Research Disproving the Model

• On 1993 Adam Wagstaff using the Danish Welfare Survey(1976) data had showed that his empirical model appeared to be more consistent with the predictions of Grossman’s theoretical model.

• On 1998 Nocera S.,Zweifel P. taken in account the dynamic nature of the Grossman model, by using panel data of Switzerland.

• On 2009, Tituas Galama and Arie Kapteyn on their paper “Grossman’s missing health threshold” disproved Grossman prediction that health and medical care are positively related.

Thank You