Grossman's Theory Of Health

Conceptual Framework

A person’s health is affected by a lot of factors like choice in medical care, insurance, social status, environment, diet and so on. To derive a model for health-related behaviors, I begin with a broadly used theory from Grossman (1972). Grossman introduced the concept of health capital and used the idea that each individual is a producer of health. That is, people can invest in their health and stock up their health capital by adding up medical care, food, education, etc. to get better health outcomes (Grossman, 1972).

People increase more their medical care to get better health. Grossman’s model identifies two motives to explain why people pursue more medical care: an investment incentive and a consumption incentive. From an investment point of view, people would have more healthy days to spend on work and leisure if they invest more in their health. From a consumption perspective, health increases people’s utility directly; that is, they feel better when they are healthier and good health increases their quality of work and leisure (Grossman, 1972; Dolan 2003).

Demand for health can be derived from the demand for utility, which is a utility maximization problem. Individual utility is a function of health stocks and a bunch of commodities from period 0 to period n.

U=U( Health Stock_0,…,Health Stock_n,Commodity_0,…,Commodity_n ) (1)

The main idea of Grossman’s paper (1972) is to treat health as a capital stock so that people can produce more health capital by investment in health.

Health Stock_(t+1)=Health Stock_t-δ Health Stock_t+Investment (2) δ is the depreciation rate which can be caused by aging, sickness or accidents during period t.

We also have to consider the househo...

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...arital status, father-at-home, mother-at-home, household members, household income and wealth indicator, to control for the three health-related behaviors, to control for the three health-related behaviors. To generate the household income, I sum up all the family’s earnings from farming, gardening, fishing, sales of crops and livestock and small household business. The wealth indicator is also generated as a dummy with a binary outcome, where the value is equals to 1 if a family owns a color TV, refrigerator, air conditioner, computer, telephone, cell phone and motorcycle simultaneously, and 0 otherwise.

Variables collected above are based on Grossman’s theory for inputs of health stock. To examine the effect of education on the health-related behaviors, I will use Grossman’s concept to derive the empirical model and use these variables to see the results.