Uncertainty, inequalities in health and the demand for health

Abstract

As it has become increasingly recognized that inequalities in health stem more from inequalities in wealth, rather than from inequalities in access to medical care, economists have begun to suggest that Michael Grossman's model of the demand for health may be a useful analytical framework for investigating the issue. Ironically, the more popular of Grossman's two submodels--the 'pure-investment' model--provides little by way of insights into the relationship between inequalities in wealth and inequalities in health. In common with other pure investment models of human capital formation, Grossman's model predicts that an individual's health investment decisions at each stage in the lifecycle will be independent of his initial wealth. This paper shows that if uncertainty is introduced into the model, this result no longer holds. It also shows that if individuals display decreasing absolute risk aversion, wealthier individuals will invest more in health capital than individuals who start life with relatively small stocks of financial capital.