Grossman Health Model PDF

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In Grossman Health Model, a consumer should do the followings to maximize his utility subject both to time and money in a given period: 1. 2. 3. 4.

Allocate time between work and leisure Spend remaining leisure time on health and non-health activities Spend income on health and non-health resources Produce health capital that may help in future years

This model assumes healthcare as constant life time investment. For simplicity, if we assume the life time is 1 day, 24-hours, then we can display the major components of Grossman Health Model on the same graph in 4 quadrants. Below is the summary of key steps (note: Quadrant 4 is discussed before Quadrant 3) Quadrant 1 • Labour-leisure trade-off with respect to allocation of time to wage-earning activities • • •

Budget constraint (BC-BC) indicates trade-off between labour and leisure (steeper line indicates higher wages) Slope of indifference curve (U 1) shows consumer’s subjective trade-off between leisure and earnings Consumer’s optimal division between market work (TW) and leisure is equilibrium point A – Assuming no days are lost to illness (TL), he will work for (24-OT*) hours and earn income G* [to be spent on medical inputs (for health production) and home good inputs]

Quadrant 2 • Trade-off between health investment (I) and home good (M) given consumer’s income and time •

Consumer divides his time and money in producing I and M based on his preferences and productivity

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The Production Possibility Curve (PPC) shows all efficient combinations of I* and M* that can be produced when all of consumer’s income (G*) and time (OT*) are used to their full potential

Quadrant 4 • Shows production of either I or M based on his preferences • • •

Width of box is amount of time remaining after allocation of time between work and leisure and height is income that was earned Contract curve – shows only combinations that are efficient for consumer to produce I or M If he spends no time or money on health, he spends all of both on M and is at O; if he spends all his money (G*) and time (TH=non-work time) on health, he is spending none on M and is at southeast corner of box

Quadrant 3 • •

Relates health expenditure (E) to level of health investment (I) If he spends TH time and E* amount of money on producing health, then I* level of health investment will be made

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Note that he will spend (OT*- TH) on, and invest M* in, the home good The higher E is, the higher I will be

In equilibrium: • •

Consumer picks point A in Quadrant 1, generating income of G* and has OT* leisure time. From Quadrant 2, consumer’s equilibrium is at A1, giving optimal investment in health of I* and in home

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good of M* In Quadrant 4, TH and E* are spent on health care.

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E* is translated through Quadrant 3 to determine level of health in investment I*

So, a consumer must the followings to maximize his utility: 1. Allocate time between work and leisure 2. Spend remaining leisure time on health and non-health activities 3. Spend income earned on health and non-health resources 4. Produce or invest in health capital for future use And, here are few implications of Grossman Health Model: • •

Optimal health stock declines as the person ages if the depreciation rate of health increases as a person ages Benefits of good health are greater for high wage workers so they demand higher optimal health stock

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The more educated people are, the less costly it is to generate health resulting in a higher optimal health stock for this group

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Individuals will allocate resources in order to produce health capital....