Baumol's Cost Disease in Acute vs. Long-term Care -
Do the Differences Loom Large?

Kaan Celebi, Jochen Hartwig and Anna Pauliina Sandqvist
Additional contact information
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
(search for similar items in EconPapers)
JEL-codes: C12 C23 I10 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2024-02
References: Add references at CitEc
Citations: Track citations by RSS feed

Published in Chemnitz Economic Papers, February 2024, pages 1-27

Downloads: (external link)
https://www.tu-chemnitz.de/wirtschaft/vwl1/RePEc/download/tch/wpaper/CEP062.pdf First version, 2024 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:tch:wpaper:cep062

Access Statistics for this paper

More papers in Chemnitz Economic Papers from Department of Economics, Chemnitz University of Technology Contact information at EDIRC.
Bibliographic data for series maintained by Marlene Richter.