Becker Friedman Institute

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A Contribution to Health-Capital Theory

The Grossman model is the canonical theory of the demand for health and health investment. This paper provides strong support for the model’s canonical status. Yet several authors have identified at least four significant limitations to the literature spawned by Grossman’s seminal 1972 papers. I show that these criticisms are not the result of a flawed model but of an unfortunate and unnecessary choice for the functional form (linear in investment) of the health-production process, and of an incorrect interpretation of the equilibrium condition for health. I find that a generalized Grossman model, with decreasing returns in investment and endogenous longevity, addresses the limitations, and provides a remarkably successful foundation for understanding decisions regarding health.

Authors: 
Titus Galama, University of Southern California
Publication Date: 
May, 2015
HCEO Working Groups: 
Publication Status: 
Document Number: 
2015-008
File Description: 
First version, April 2015