Grossman model

This slide contains a overview of Grossman Model . which includes concept of health as a human capital, little bit biography of michael grossman and his model and application of that model

1. Health as a Human Capital : Overview of Grossman Model Prepared by – Sumit Kumar Das

2. CONTENT Section I : Education, Field of Work and Major C ontribution in Health E conomics by Michael Grossman Section II : Concept on “Health as a Human Capital” Section III : Outline of the Model – Assumptions, Functions & Equilibrium C onditions Section IV : Application of the Model

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

4. 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.

5. 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.

6. 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.

7. 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.

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

9. Concept Poor countries tend to be unhealthy, and unhealthy countries tend to be poor. I mprovements 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.

10. 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.

11. 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.

12. 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

13. 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.

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

15. Basic Model Let the intertemporal utility function of a typical consumer be inherited stock of health (given at i =0 ) stock of health in time period i (endogenous) service flow per unit stock total consumption of “health services” consumption of another commodity (aggregate of all commodities besides health) Assumptions : The length of life as of the planning date ( n ) is fixed – endogenous Death takes place when

16. Net investment in the stock of health: goods purchased in the market that contribute to gross investment in health (Medical care) 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 i th period (exogenous but vary with the age of the individual) gross investment in the stock of health goods input in the production of the commodity time inputs consumer’s stock of knowledge or human capital (exogenous) Assumptions : Increase in knowledge capital raises the efficiency of the production process in the nonmarket or household sector Production functions are linear homogeneous in the endogenous market goods & time inputs

17. Goods Budget Constraint: (4) Present value of outlays on goods Present value of earnings income over the life cycle Initial Assets ( discounted property income ) Prices of Hourly wage rate Hours of work Market rate of interest Time Budget Constraint: (5) Time lost from market & nonmarket activities due to illness & injury Total amount of time available in any period (measured in hours) Assumption : Sick time is inversely related to the stock of health i.e.

18. Full Wealth Constraint: Using (4) & (5) (6) Full Wealth Discounted 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

19. The equilibrium quantities of H i and Z i 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

20. Section IV : Application of the Model

21. 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. C lassified into two domain P aper based on cross-sectional data Paper based on Longitudinal data

22. 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.

23. 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.

24. Research D isproving 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.

25. 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 .

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