The Grossman model

The central proposition of the Grossman model (Grossman 1972) is that health can be viewed as a durable capital stock that produces an output of healthy time. It is assumed that individuals inherit an initial stock of health that depreciates with age and can be increased by investment. The model is similar to human capital models that have been used to measure wage rates.

…a person’s stock of knowledge affects his market and nonmarket productivity, while his stock of health determines the total amount of time he can spend producing money earnings and commodities.

In the Grossman model, individual activity affects one’s stock of health and thus duration of life.

Gross investments in health capital are produced by household production functions whose direct inputs include the own time of the consumer and market goods such as medical care, diet, exercise, recreation, and housing…the level of health of an individual is not exogenous but depends, at least in part, on the resources allocated to its production.

People can improve their health by diet, exercise and preventive visits to see the doctor.  However, all these items take time or money.  Thus, it is not optimal to spend 100% of your time improving your health since (i) you would not be able to work to generate income to consume goods and services during your life and (ii) you would not have leisure time to enjoy your life.  Thus, individuals will inevitably trade off time cost and monetary spending (e.g., on medicines, doctors visits) against leisure and consuming other goods.  Additionally, there is likely some finite upper limit in terms of how much health investment can actually affect your long term help.

Another interesting aspect of the Grossman model, however, is that it concludes that health does not affect productivity. He assumes that human capital affects productivity and wage rate; health only affects the number of days a person can work (because they are not sick). Thus, in the Grossman model, health affects one’s annual salary but not one’s hourly wage.

The model makes a number of predictions. 

First, people will invest more in medical goods and services as the age. He assumes that health stock may depreciate faster as people age and in response people will invest more in health activities and medicine as they age.  “…given a relatively inelastic demand curve for health, individuals would desire to offset part of the reduction in health capital caused by an increase in the rate of depreciation by increasing their gross investments.”

Second, the model predicts high-wage individuals will invest more in health through spending on medical goods and services compared to their own time investments, since the cost of time is higher.

Third, “if education increases the efficiency with which gross investments in health are produced, then the more educated would demand a larger optimal stock of health.”


1 Comment

  1. How is the Grossman demand model relevant in healthcare economics today? Has it had any bearing upon healthcare insurance industry ?

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