Empirical Evidence for Decreasing Returns to Scale in a Health Capital Model

34 Pages Posted: 22 May 2012

See all articles by Titus J. Galama

Titus J. Galama

USC Center for Economic and Social Research

Patrick Hullegie

VU University Amsterdam - Department of Economics

Erik Meijer

University of Southern California; RAND Corporation

Sarah Outcault

RAND Corporation

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2012

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.

Keywords: health investment, lifecycle model, Grossman model, optimal control

JEL Classification: I12, J24, D91

Suggested Citation

Galama, Titus J. and Hullegie, Patrick and Meijer, Erik and Outcault, Sarah, Empirical Evidence for Decreasing Returns to Scale in a Health Capital Model (February 28, 2012). Netspar Discussion Paper No. 02/2012-016, Available at SSRN: https://ssrn.com/abstract=2064569 or http://dx.doi.org/10.2139/ssrn.2064569

Titus J. Galama

USC Center for Economic and Social Research ( email )

Playa Vista, CA
United States
+310 430 6358 (Phone)

Patrick Hullegie (Contact Author)

VU University Amsterdam - Department of Economics ( email )

De Boelelaan 1105
1081 HV Amsterdam
Netherlands

Erik Meijer

University of Southern California ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

Sarah Outcault

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

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