Question

Present the Grossman Model for the Demand for Health and health care. Discuss its predictions for the demand for health and health care.

Answer 1

Grossman Model for the Demand for Health and health care

• An approach of consumer behavior draws a distinction between fundamental objects of choice (called commodities) and market goods (ex Becker 1965).
• Specifically 2 commodities are featured: health + non-health commodity
• The demand for medical care is a derived demand from the demand for Health.

• Example. Using traveling time and transportation to produce visits. Using time, books and teachers to produce additional knowledge. Using time, medical care and education to produce health. Etc.

2 reasons health is demanded

• As a consumption commodity, it enters their utility function (sick days are sources of disutility);
• As an investment commodity, it determines the total amount of time available for market and non-market activities.

Three Roles of Health in Grossman Model

• Health is a consumption good: it contributes directly to the utility function in each period. Health is valued per se.
• Health is an input into production. It is used to produce productive time which is in turn used to produce more H and Z.
• Health is a form of capital: it accumulates and can depreciate from period to period. Today's improvements mean better health tomorrow.

Utility function (health as a consumption good)

• U_t = (H_t, Z_t)

where

H_t is level of health
Z_t is "home good"
(i.e. non-health things contributing to utility like
video games)

Time constraint in the Grossman model

• Θ = T^W + T^Z + T^H + T^S

Where
W=Work
Z=Playing
H=improve Health
S=Being sick

Predictions for the demand for health and health care.

• 1) ... Better health among the educated

• 2) ... Declining health among the aging

Health decline among the aging

Recalling: H_t = H((1-γ)H_(t-1), ...

• -> depreciation γ is NOT constant but increases

• -> as γ increases -> (r + γ) increases

• -> the more resources needed to stay at same H*

Education on Health

Well-educated individuals are more efficient producers of health

• -> they are more efficient at each level of H investments:

• -> MEC_c > MEC_h
• -> H_c > H_h

• where here c=college graduate and h=high School dropout