Demand for Health: Grossman Model- I

Summary:

A model of Human Capital

Health as Human Capital

Single-period utility

Time constraint within a single period

Difference between H and X

A model of Human Capital:

Health (H) is a choice and people can choose H. People have the ability to control their level of health. Human Capital is a collection of productive skills embodied in a person that can be used to generate earnings in labor market and to augment household's consumption options.

Investment in human capital includes investment in schooling and investment in training during job. Cost of investment includes direct outlays  on market goods and opportunity cost of time.

Health as Human capital:

Health vs Other Human capital: A person's stock of knowledge affects his market and non market productivity. Health affects the participatory time in working activity. Human capital includes health and information about wages and potential job offers. Several authors have thought of health as human capital. However, Grossman was the first to develop a whole model of the demand for human capital.

Why do we need a model for demand for health?

When an individual demands for medical care, what he/she seeks is health. it seems logical to study the demand for health before the demand for healthcare.

Single-period Utility:

First role of health in Grossman model is as a consumption good. As we know,

                                         Ut = U( Ht, Xt )

where, 

Ht is the level of health and Xt is a composite good that represents everything else.

Examples of trade-off between H and X:

Snacks may increase X, and it poses threat to health (here X is Xb)

Exercise increases both X and H (here X is Xg)

Time Constraint within a single period:

Constraints: When an individual try to maximize his utility, he faces several constraints like time constraint and market budget constraint.

24 hours a day, ' An individual divides his time between 4 activities: Working (W), Playing (X), Improving his health (H), or lying in bed sick (S).

                                         Time= Tw + Tx + Th + Ts

                                         Time -Ts = Productive

Activity                                                    Purpose                                          Examples

Working (W)                                To earn wages/income to                         Working in IT firm, Playing 

                                                    purchase items that will enhance                professionally for Indian 

                                                                  H and X                                                 Cricket team.

Playing/ Leisure (X)                            To enhance X                                         Playing chess, etc..

Improving Heath (H)                             Enhances H                                         Jogging, Healthcare

Being Sick (S)                                   None/ Wasted time                      Spending day home in bed, doing 

                                                                                                                               nothing.

Difference between H and X:

X is flow variable created and consumed each period. H is a stock variable accumulates or deteriorates from period to period.

Interpretations:

* Level of H reflects the complete history of past inputs and decisions pertaining to health. By contrast, enjoyment from today's 'other good' is forgotten by tomorrow and does not contribute to tomorrow's X.

* In any given period, t, before individually has allocated anytime or money, Xt starts out at 0. Ht starts out at Ht-1.

* Individual treats Ht-1 as a given during period t, since he cannot go back into past and change his history of health decisions which determined Ht-1.