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The Value of Life and the Rise in Health Spending

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Author Info
Robert E Hall
Charles I Jones

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Abstract

Over the past half century, Americans spent a rising share of total economic resources on health and enjoyed substantially longer lives as a result. Debate on health policy often focuses on limiting the growth of health spending. We investigate an issue central to this debate: Is the growth of health spending a rational response to changing economic conditions-notably the growth of income per person? We develop a model based on standard economic assumptions and argue that this is indeed the case. Standard preferences-of the kind used widely in economics to study consumption, asset pricing, and labor supply-imply that health spending is a superior good with an income elasticity well above one. As people get richer and consumption rises, the marginal utility of consumption falls rapidly. Spending on health to extend life allows individuals to purchase additional periods of utility. The marginal utility of life extension does not decline. As a result, the optimal composition of total spending shifts toward health, and the health share grows along with income. In projections based on the quantitative analysis of our model, the optimal health share of spending seems likely to exceed 30 percent by the middle of the century. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Article provided by MIT Press in its journal The Quarterly Journal of Economics.

Volume (Year): 122 (2007)
Issue (Month): 1 (02)
Pages: 39-72
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Handle: RePEc:tpr:qjecon:v:122:y:2007:i:1:p:39-72

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Chris Papageorgiou & Andreas Savvides & Marios Zachariadis, . "International Medical R&D Spillovers," Departmental Working Papers 2004-03, Department of Economics, Louisiana State University. [Downloadable!]
  2. Gilad Sorek, 2006. "Advancing Medical Technology, Aging Population, and Economic Growth," DEGIT Conference Papers c011_046, DEGIT, Dynamics, Economic Growth, and International Trade. [Downloadable!]
  3. Lans Bovenberg & Harald Uhlig, 2006. "Pension Sytems and the Allocation of Macroeconomic Risk," SFB 649 Discussion Papers SFB649DP2006-066, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
    Other versions:
  4. Kenichi Ueda, 2008. "Life Expectancy and Income Convergence in the World:A Dynamic General Equilibrium Analysis," IMF Working Papers 08/158, International Monetary Fund. [Downloadable!]
  5. Garima Malik, 2006. "An Examination of the relationship between Health and Economic Growth," Indian Council for Research on International Economic Relations, New Delhi Working Papers 185, Indian Council for Research on International Economic Relations, New Delhi, India. [Downloadable!]
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    Other versions:
  8. Ryan D. Edwards, 2008. "The Cost of Uncertain Life Span," NBER Working Papers 14093, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Frits Bos & Rudy Douven & Esther Mot, 2004. "Four long-term scenarios for the Dutch government and health-care sector," CPB Documents 72, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
  10. Alan M. Garber & Jonathan Skinner, 2008. "Is American Health Care Uniquely Inefficient?," NBER Working Papers 14257, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Mahmoud Arayssi & Sarkis Khoury & Rania Uwaydah Mardini, 2007. "The Value of Life: A New Labor Theory-Based Model," Journal of Business Valuation and Economic Loss Analysis, Berkeley Electronic Press, vol. 1(1), pages 3. [Downloadable!] (restricted)
  12. Chris Papageorgiou & Andreas Savvides & Marios Zachariadis, . "International Medical Technology Diffusion," University of Cyprus Working Papers in Economics 2-2005, University of Cyprus Department of Economics. [Downloadable!]
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  13. Charles I. Jones, 2005. "More life vs. more goods: explaining rising health expenditures," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue May 27. [Downloadable!]
  14. Daron Acemoglu & Veronica Guerrieri, 2006. "Capital Deepening and Non-Balanced Economic Growth," NBER Working Papers 12475, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Albert N. Link & Christopher J. Ruhm, 2008. "Bringing Science to Market: Commercializing from NIH SBIR Awards," NBER Working Papers 14057, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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    Other versions:
  17. Hanming Fang & Alessandro Gavazza, 2007. "Dynamic Inefficiencies in Employment-Based Health Insurance System Theory and Evidence," NBER Working Papers 13371, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. Martin Weitzman, 2007. "Structural Uncertainty and the Value of Statistical Life in the Economics of Catastrophic Climate Change," NBER Working Papers 13490, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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