The Human Capital Model of the Demand for Health

Abstract

Almost three decades have elapsed since I published my National Bureau of EconomicResearch monograph [Grossman (1972b)] and Journal of Political Economy paper [Grossman 1972a)] dealing with a theoretical and empirical investigation of the demand for the commodity "good health." 1 My work was motivated by the fundamental difference between health as an output and medical care as one of a number of inputs into the production of health and by the equally important difference between health capital and other forms of human capital.According to traditional demand theory, each consumer has a utility or preference function that allows him or her to rank alternative combinations of goods and services purchased in the market.Consumers are assumed to select that combination that maximizes their utility function subject to an income or resource constraint: namely, outlays on goods and services cannot exceed income.While this theory provides a satisfactory explanation of the demand for many goods and services, students of medical economics have long realized that what consumers demand when they purchase medical services are not these services per se but rather better health.Indeed, as early as 1789, Bentham included relief of pain as one of fifteen "simple pleasures" which exhausted the list of basic arguments in one's utility function [Bentham (1931)].The distinction between health as an output or an object of choice and medical care as an input had not, however, been exploited in the theoretical and empirical literature prior to 1972.My approach to the demand for health has been labeled as the human capital model in much of the literature on health economics because it draws heavily on human capital theory [Becker (1964, 1967), Ben-Porath (1967), Mincer (1974)].According to human capital theory, increases in a person's stock of knowledge or human capital raise his productivity in the market