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PRINTED FROM the OXFORD RESEARCH ENCYCLOPEDIA, ECONOMICS AND FINANCE (oxfordre.com/economics). (c) Oxford University Press USA, 2020. All Rights Reserved. Personal use only; commercial use is strictly prohibited (for details see Privacy Policy and Legal Notice).

date: 26 September 2020

Summary and Keywords

One of the implications of the human capital literature of the 1960s was that a great many decisions individuals make that have consequences not just for the point in time when the decision is being made but also for the future can be thought of as involving investments in certain types of capital. In health economics, this led Michael Grossman to propose the concept of health capital, which refers not just to the individual’s illness status at any point in time, but to the more fundamental factors that affect the likelihood that she will be ill at any point in her life and also affect her life expectancy at each age. In Grossman’s model, an individual purchased health-related commodities that act through a health production function to improve her health. These commodities could be medical care, which could be seen as repair expenditures, or factors such as diet and exercise, which could be seen as ongoing additions to her health—the counterparts of adding savings to her financial capital on a regular basis. The individual was assumed to make decisions about her level of consumption of these commodities as part of an intertemporal utility-maximizing process that incorporated, through a budget constraint, the need to make tradeoffs between health-related goods and goods that had no health consequences. Pauline Ippolito showed that the same analytical techniques could be used to consider goods that were bad for health in the long run—bad diet and smoking, for example—still within the context of lifetime utility maximization. This raised the possibility that an individual might rationally take actions that were bad for her health in the long run. The logical extension of considering smoking as bad was adding recognition that smoking and other bad health habits were addictive. The notion of addictive commodities was already present in the literature on consumer behavior, but the consensus in that literature was that it was extremely difficult, if not impossible, to distinguish between a rational addict and a completely myopic consumer of addictive goods. Gary Becker and Kevin Murphy proposed an alternative approach to modeling a forward-looking, utility-maximizing consumer’s consumption of addictive commodities, based on the argument that an individual’s degree of addiction could be modeled as addiction capital, and which could be used to tackle the empirical problems that the consumer expenditure literature had experienced. That model has become the most widely used framework for empirical research by economists into the consumption of addictive goods, and, while the concept of rationality in addiction remains controversial, the Becker-Murphy framework also provides a basis for testing various alternative models of the consumption of addictive commodities, most notably those based on versions of time-inconsistent intertemporal decision making.

Keywords: Grossman model, rational addiction model, health capital, addiction, health investment, health economics

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