Health as an unobservable

The results show, among other things, that health and permanent income have mutual, positive impacts and both age and education have important direct and indirect effects on health.

Abstract

This paper develops a model to analyze the demand for health care. It differs from current practice in that (1) it deals explicitly with the complex relation between income, health, health insurance, and the demand for health care, and (2) 'health' is treated as an unobservable variable. We present the Maximum Likelihood estimates of an eleven-equation, simultaneous multiple-indicator, multiple-causes (MIMIC) model, containing two simultaneously determined unobservables and, in total, nine 'indicators'. Data used stem from a health-care survey among 8000 households in The Netherlands. The results show, among other things, that health and permanent income have mutual, positive impacts. Both age and education have important direct and indirect (via permanent income) effects on health. The estimated impact of the availability of health care on individual demand confirms similar results based on aggregated data.