Working Paper: CEPR ID: DP7255
Authors: Daron Acemoglu; Amy Finkelstein; Matthew J. Notowidigdo
Abstract: Health expenditures as a share of GDP have more than tripled over the last half century. A common conjecture is that this is primarily a consequence of rising real per capita income, which more than doubled over the same period. We investigate this hypothesis empirically by instrumenting for local area income with time-series variation in global oil prices between 1970 and 1990 interacted with cross-sectional variation in the oil reserves across different areas of the Southern United States. This strategy enables us to capture both the partial equilibrium and the local general equilibrium effects of an increase in income on health expenditures. Our central estimate is an income elasticity of 0.7, with an elasticity of 1.1 as the upper end of the 95 percent confidence interval. Point estimates from alternative specifications fall on both sides of our central estimate, but are almost always less than 1. We also present evidence suggesting that there are unlikely to be substantial national or global general equilibrium effects of rising income on health spending, for example through induced innovation. Our overall reading of the evidence is that rising income is unlikely to be a major driver of the rising health share of GDP.
Keywords: health care; income; technology
JEL Codes: H51; I1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| income (E25) | health expenditures (H51) |
| 10% increase in income (E25) | 7.2% increase in health expenditures (H51) |
| income elasticity of health expenditures (I14) | increase in health expenditures (H51) |
| rising income (E25) | increase in health share of GDP (H51) |
| rising income (E25) | increase in real per capita health expenditures (H51) |
| rising income (E25) | increase in real per capita health spending (H51) |