By Christine de la Maisonneuve & Joaquim Oliveira Martins

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Extra info for A PROJECTION METHOD FOR PUBLIC HEALTH AND LONG-TERM CARE EXPENDITURES ECONOMICS DEPARTMENT WORKING PAPERS No. 1048

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On the other hand, Di Matteo and Di Matteo (1998) argue that because health care is labour intensive, its cost may increase as a function of average income, so that measured income elasticity is blurred by the price effect. Since the price elasticity is presumably negative, the income coefficient is likely to be biased downward. 96. , (2009), most of the studies are based on simple correlations between income and health expenditure across individuals, across countries and over time. Their study provides causal estimates of the effect of income on aggregate health spending in US regions.

However in the majority of them, the elasticity is lower than one. Their result suggests that health is a necessity rather than a luxury. 99. According to Atella and Marini (2004), the disagreement about income elasticity comes from two sources: the inclusion of specific regressors and functional specification used to estimate the parameter. Their survey does not find a single answer to the question of the value of the elasticity. When assuming homoskedasticity and no-correlation in errors, the authors find elasticities always greater than unity.

When controlling for individual fixed-effects, the inclusion of a common time trend significantly reduces the income elasticity to below one. This result is more robust than that of the pooled OLS. Testing a one-way error component model in the individual variables for each type of per capita health care expenditure, the authors find results that are fairly close to those of the one-way fixed effects model. Overall, results confirm that the inclusion of a common trend significantly lowers the income elasticity (below one).

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A PROJECTION METHOD FOR PUBLIC HEALTH AND LONG-TERM CARE EXPENDITURES ECONOMICS DEPARTMENT WORKING PAPERS No. 1048 by Christine de la Maisonneuve & Joaquim Oliveira Martins


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