Is health care a luxury or necessity good? Evidence from Asian countries

Abstract

This study investigates long run relationship between health care expenditure and real income in fifteen selected Asian countries over the period 1995-2014 using the panel cointegration tests and controlling for cross-sectional dependence through unobserved common correlated factors (UCFs). The results show that health care expenditure and income are cointegrated. It is found that the income elasticity scales down when UCFs are controlled, which implies that ignoring UCFs produces biased and inconsistent estimates. The Mean Group and Common Correlated Effects Mean Group estimates reveal that long run income elasticity of health care is less than unity for the entire panel, indicating that health care is a necessity good in Asian countries. Within the sample, income elasticity for South Asian Association for Regional Cooperation countries and Association of Southeast Asian Nations countries is also less than unity. However, many of the previous studies report income elasticity greater than unity. The difference between the results we found in our study compared to previous work could be attributed to the use of estimation methodology and the sample analyzed. Overall, health care has been found a necessity good in Asian countries in the long run.

Keywords: Cross-sectional dependence; GDP per capita; Health care expenditure; Panel cointegration.