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Empirical evidence for decreasing returns to scale in a health capital model

Author

Listed:
  • Galama, T.
  • Hullegie, P.
  • Meijer, E.
  • Outcault, S.
Abstract
We estimate a health investment equation, derived from a health capital model that is an extension of the well-known Grossman model. Of particular interest is whether the health production function has constant returns to scale, as in the standard Grossman model, or decreasing returns to scale, as in the Ehrlich-Chuma model and extensions thereof. The model with decreasing returns to scale has a number of theoretically and empirically desirable characteristics that the constant returns model does not have. Although our empirical equation does not point-identify the decreasing returns to scale curvature parameter, it does allow us to test for constant versus decreasing returns to scale. The results are suggestive of decreasing returns and in line with prior estimates from the literature. But when we attempt to control for the endogeneity of health by using instrumental variables, the results become inconclusive. This brings into question the robustness of prior estimates in this literature.

Suggested Citation

  • 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.
    • Handle: RePEc:yor:hectdg:12/05
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    References listed on IDEAS

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    2. Wang, Jiunn & Marsiliani, Laura & Renström, Thomas, 2020. "Optimal sin taxes in the presence of income taxes and health care," Economics Letters, Elsevier, vol. 186(C).
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    4. Lazuka, Volha, 2021. "Heterogeneous Returns to Medical Innovations," Lund Papers in Economic History 225, Lund University, Department of Economic History.
    5. Juergen Jung & Chung Tran, 2016. "Market Inefficiency, Insurance Mandate and Welfare: U.S. Health Care Reform 2010," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 20, pages 132-159, April.
    6. Jung, Juergen & Tran, Chung, 2022. "Social health insurance: A quantitative exploration," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    7. Titus J Galama & Hans van Kippersluis, 2019. "A Theory of Socio-economic Disparities in Health over the Life Cycle," The Economic Journal, Royal Economic Society, vol. 129(617), pages 338-374.
    8. Bolin, Kristian & Liljas, Bengt & Lindgren, Björn, 2014. "Individual technologies for health - the implications of distinguishing between the ability to produce health investments and the capacity to benefit from those investments," Working Papers in Economics 587, University of Gothenburg, Department of Economics.
    9. Juergen Jung & Chung Tran, 2023. "Health Risk, Insurance, and Optimal Progressive Income Taxation," Journal of the European Economic Association, European Economic Association, vol. 21(5), pages 2043-2097.
    10. Titus J. Galama & Hans van Kippersluis, 2013. "Health Inequalities through the Lens of Health-Capital Theory: Issues, Solutions, and Future Directions," Research on Economic Inequality, in: Health and Inequality, volume 21, pages 263-284, Emerald Group Publishing Limited.
    11. Vincenzo Atella & Federico Belotti & Domenico Depalo, 2017. "Drug therapy adherence and health outcomes in the presence of physician and patient unobserved heterogeneity," Health Economics, John Wiley & Sons, Ltd., vol. 26(S2), pages 106-126, September.
    12. Jung, Juergen & Tran, Chung & Chambers, Matthew, 2017. "Aging and health financing in the U.S.: A general equilibrium analysis," European Economic Review, Elsevier, vol. 100(C), pages 428-462.
    13. Borgersen, Trond-Arne & King, Roswitha M., 2015. "Endogenous supply side constraints to export-led growth and aggregate growth implications in transition economies," Structural Change and Economic Dynamics, Elsevier, vol. 33(C), pages 96-109.
    14. Burggraf, Christine, 2017. "Russian demand for dietary quality: Nutrition transition, diet quality measurement, and health investment theory," Studies on the Agricultural and Food Sector in Transition Economies, Leibniz Institute of Agricultural Development in Transition Economies (IAMO), volume 86, number 86.
    15. Glauben, Thomas & Grecksch, Wilfried & Burggraf, Christine, 2015. "Stochastic control of individual's health investments," EconStor Conference Papers 249588, ZBW - Leibniz Information Centre for Economics.
    16. Audrey Laporte, 2014. "Should the Grossman model of investment in health capital retain its iconic status?," Working Papers 140003, Canadian Centre for Health Economics, revised Jan 2015.
    17. Juergen Jung & Chung Tran, 2018. "Optimal Progressive Income Taxation in a Bewley-Grossman Framework," ANU Working Papers in Economics and Econometrics 2018-662, Australian National University, College of Business and Economics, School of Economics.
    18. Michael Grossman, 2022. "The demand for health turns 50: Reflections," Health Economics, John Wiley & Sons, Ltd., vol. 31(9), pages 1807-1822, September.
    19. Burggraf, Christine, 2017. "Russian demand for dietary quality: Nutrition transition, diet quality measurement, and health investment theory," Studies on the Agricultural and Food Sector in Transition Economies 269539, Institute of Agricultural Development in Transition Economies (IAMO).
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    More about this item

    Keywords

    health investment; lifecycle model; Grossman model; optimal control;
    All these keywords.

    JEL classification:

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

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