Baumol's Cost Disease in Acute vs. Long-term Care -
Do the Differences Loom Large?
Kaan Celebi, Jochen Hartwig and Anna Pauliina Sandqvist
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Kaan Celebi: Chemnitz University of Technology
Jochen Hartwig: Chemnitz University of Technology, KOF Swiss Economic Institute, ETH Zurich, Hans Böckler Stiftung, Forum for Macroeconomics and Macroeconomic Policies, Düsseldorf
Anna Pauliina Sandqvist: Deloitte GmbH Wirtschaftsprüfungsgesellschaft, Munich
No 62, Chemnitz Economic Papers from Department of Economics, Chemnitz University of Technology
Abstract: Baumol's (1967) model of ‘unbalanced growth’ yields a supply-side explanation for the ‘cost explosion’ in health care. Applying a testing strategy suggested by Hartwig (2008), a sprawling literature affirms that the ‘Baumol effect’ has both a statistically and economically significant impact on health care expenditure growth. Skeptics maintain, however, that the proliferation of hi-tech medicine in acute care is clearly at odds with the assumption underlying Baumol's model that productivity-enhancing machinery and equipment is only installed in the ‘progressive’ (i.e. manufacturing) sector of the economy. They argue that Baumol's cost disease may affect long-term care, but not acute care. Our aim in this paper is to test whether Baumol's cost disease affects long-term care and acute care differently. Our testing strategy consists in combining Extreme Bounds Analysis (EBA) with an outlier-robust MM estimator. Using panel data for 23 OECD countries, our results provide robust and statistically significant evidence that expenditures on both acute care and long-term care are driven by Baumol's cost disease, even though the effect on long-term care expenditures is more pronounced.
Keywords: Health care expenditure; Baumol's cost disease; Extreme Bounds Analysis; MM estimator; OECD panel
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JEL-codes: C12 C23 I10 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2024-02
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Published in Chemnitz Economic Papers, February 2024, pages 1-27
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https://www.tu-chemnitz.de/wirtschaft/vwl1/RePEc/download/tch/wpaper/CEP062.pdf First version, 2024 (application/pdf)
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Persistent link: https://EconPapers.repec.org/RePEc:tch:wpaper:cep062
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