Three Essays in Welfare and Health Economics: Social Choice, Health Capital, and Health Expenditure

Abstract

This dissertation contains three chapters: one on social choice theory in the field of welfare economics; one that integrates health capital into endogenous growth theory in the fields of health economics and macroeconomics; and one that investigates health expenditure forecasting in the fields of health economics and economic forecasting.

The leading chapter titled “The Possibility of Anonymous Social Orderings Using Curvature of Indifference Hypersurfaces” is a theoretical analysis that concerns the aggregation of individual preferences into a social ordering. Working in a higher-dimensional economic environment where an indifference hypersurface is the level set of a utility function representing a preference relation, we relax the standard IIA assumption by introducing information regarding the curvature of the indifference hypersurface, which partly describes the shape of an indifference hypersurface. We show that, using curvature information, it is possible to construct a rational, anonymous social ordering function that satisfies a weaker version of IIA. The minmax-like definition of our social ordering function coincides with the Rawlsian difference principle under certain circumstances. The importance of this pure theorem is to show that the conditions for democracy can be weaker than many think.

The second chapter ``Health Capital and Endogenous Growth Theory" is an applied theoretical paper at the intersection of macroeconomics and health. It aims to unravel the competing effects of the health investment. Investing in health involves trade-offs such as short-term loss in consumption and the associated loss in welfare versus longer-term enhanced health, which directly improves the welfare and can potentially generate productivity gains that increase long-run consumption and welfare. This chapter examines an endogenous growth model of health investment in a two-sector economy. It explores, both analytically and numerically, the equilibrium shift and transitional dynamics after a once-for-all policy initiated by the government that reallocates labor from manufacturing to the health sector for the purpose of investing in health capital. We find that such a health investment policy improves health status in the long run, but harms the economic growth in both short and long term. The relative sizes of these competing effects depend on the specific health parameters of a country. Within the plausible range for the value of health relative to consumption, households gain welfare in the long run as long as the effectiveness of labor in health production is large. The health investment policy only makes households worse off if both labor is not productive in producing health and households value health relatively low versus consumption. For developed countries with publically-financed health sectors such as Canada where the productivity-enhancing effect of health is small, the investment in health improves welfare but harms economic growth. When these countries care welfare more than economic development, the substantial long-term gains in health and welfare are worth the short-term small pain in consumption and the long-term moderate harm in economic growth. The findings challenge the policy rationales of World Bank (1993) and World Health Organization (2001) in the sense that good health, though improves welfare, increases neither substantially the economic productivity of workers nor the economic growth rate of countries. The model itself serves as a sensitivity test for those in Van Zon and Muysken (2005), Hall and Jones (2007) in several ways. It is hoped that the relative simplicity of our model, compared to some recent models in the existing theoretical literature, can help close the gap between the formal academic work on this topic and the actual debates among policy makers in both developed and developing countries.

The third chapter “Forecasting Health Expenditure: Methods and Applications to International Databases” is an empirical piece in health economics. It examines a number of issues encountered when using standard health accounts data to forecast national health expenditures. In particular, it focuses on measurement issues, model specifications, and a comparison of performance indicators based on commonly used health accounts data from OECD. It assesses the performance of alternative forecasting methods based on three criteria --- accuracy, precision, and certainty. Based on these criteria, it assesses the performance of model specifications including univariate (i.e., health spending) and multivariate (e.g., macroeconomic factors), static (e.g., fixed effect) and dynamic (e.g., dynamic panel), and single-equation models (e.g., ARIMA) and system of equations (e.g., VAR). It uses the better-performing models to forecast health expenditures for individual countries. This analysis makes three contributions to the literature on forecasting health expenditures. First, with longer data series, in contrast to some previous papers on health expenditure projections, we obtain a result that is more conventional in the forecasting field --- econometric time series models and statistical smoothing models perform better than econometric panel data models. Second, a recent literature review of health expenditure forecasting suggests that with better computing power and more refined data, the future of forecasting is complicated micro models. But modeling and understanding the determinants of expenditure growth (whether using micro data or CGE macro models) require considerably more data and effort, and may still do worse with pure forecasting. This chapter confirms this. At the same time, it contributes to the call for more rigorous methods of forecasting, for more transparency, and for better assessment of performance. This analysis can inform both research and policy debate on budgetary planning and fiscal sustainability of health expenditure.