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
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

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.
• 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.

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
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 minHHi 

16. Net investment in the stock of health:
iI
i
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

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)
iiandVP Prices of iiandXM
iW Hourly wage rate
iTW Hours of work
r 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
H
TL

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 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 healthRate of
depreciati
on
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.
• Classified into two domain
Paper 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 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.

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.

26. Thank You