Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/286588 
Year of Publication: 
2024
Series/Report no.: 
Chemnitz Economic Papers No. 062
Publisher: 
Chemnitz University of Technology, Faculty of Economics and Business Administration, Chemnitz
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.
Subjects: 
Health care expenditure
Baumol's cost disease
Extreme BoundsAnalysis
MM estimator
OECD panel
JEL: 
C12
C23
I10
Document Type: 
Working Paper

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