Grossman’s demand model has revolutionized the economic analysis of health
(Leibowitz, 2004). This model has opened up the possibility of further research in the
areas of health economics, for example, allocating time between income and leisure,
allocating remaining leisure time on health and non health activities, allocating earned
income to health and non health resources, producing health capital for use in future
years. The model, however, is not free from criticisms. The questions raised by the
researchers are on unrealistic assumptions of the theory. The assumptions that are
often criticized are the assumption of perfect information, deterministic nature of the
model, and the endogeneity of length of life, among others. Some researchers have
raised serious issues on methodologies that are used in estimation of Grossman
demand model. For example, Ehrlich and Chuma (1990) have claimed that if health
investment functions assume constant returns to scale technology, which is used by
Grossman, creates “bang-bang” problem with respect to optimal investment and
health maintenance choices. Similarly, Wagstaff (1993) has argued that the empirical
formulation used by Grossman is inappropriate because it fails to take into account
the inherently dynamic character of the health investment process.
Grossman’s demand model has revolutionized the economic analysis of health
(Leibowitz, 2004). This model has opened up the possibility of further research in the
areas of health economics, for example, allocating time between income and leisure,
allocating remaining leisure time on health and non health activities, allocating earned
income to health and non health resources, producing health capital for use in future
years. The model, however, is not free from criticisms. The questions raised by the
researchers are on unrealistic assumptions of the theory. The assumptions that are
often criticized are the assumption of perfect information, deterministic nature of the
model, and the endogeneity of length of life, among others. Some researchers have
raised serious issues on methodologies that are used in estimation of Grossman
demand model. For example, Ehrlich and Chuma (1990) have claimed that if health
investment functions assume constant returns to scale technology, which is used by
Grossman, creates “bang-bang” problem with respect to optimal investment and
health maintenance choices. Similarly, Wagstaff (1993) has argued that the empirical
formulation used by Grossman is inappropriate because it fails to take into account
the inherently dynamic character of the health investment process.
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