Abstract
This paper investigates the long-run relationship between health care expenditures (HCE) and income using Canadian provincial data spanning a period of 40 years from 1981 to 2020. We study the non-stationary and cointegration properties of HCE and income and estimate the long-run income elasticities of HCE. Using heterogeneous panel models that incorporate cross-section dependence via unobserved common correlated factors to capture global shocks, we estimate long-run income elasticities that lie in the 0.11–0.16 range. Our results indicate that health care is a necessity good for Canada. These elasticity estimates are much smaller than those estimated in other studies for Canada. We find that HCE and income in Canada are cointegrated and that short-run changes in federal transfers significantly and positively affect HCE.
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