Is Health Care Infected by Baumol’s Cost Disease? Test of a New Model

Akinwande A. Atanda, Andrea Menclova and W. Reed ()

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: Rising health care costs are a policy concern across the OECD and relatively little consensus exists concerning their causes. One explanation that has received revived attention is Baumol’s Cost Disease (BCD). However, developing a theoretically-appropriate test of BCD has been a challenge. In this paper, we construct a two-sector model firmly based on Baumol’s axioms. We then theoretically derive two propositions that can be tested using observable variables. In particular, we predict that: 1) the relative price index of the health care sector, and 2) the share of total labor employed in the health care sector should both be positively related to economy-wide productivity. Using annual data from 27 OECD countries over the years 1995-2013 and from 14 U.S. industry groups over the years 1947-2015, we show that empirical evidence for the existence of BCD in health care is sensitive to model specification and disappears once we address spurious correlation due to contemporaneous trending and other econometric issues.

Keywords: Baumol’s Cost Disease; health care industry; panel data (search for similar items in EconPapers)
JEL-codes: E24 I11 J30 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2016-11-30
New Economics Papers: this item is included in nep-hea and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Is health care infected by Baumol's cost disease? Test of a new model (2018)
Working Paper: Is Health Care Infected by Baumol’s Cost Disease? Test of a New Model (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:cbt:econwp:16/33

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