Stochastic control of individual's health investments

Christine  Burggraf; Wilfried  Grecksch; Thomas  Glauben

doi:10.3934/proc.2015.0159

Article Contents

2015, Volume 2015: 159-168. Doi: 10.3934/proc.2015.0159 open access

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Stochastic control of individual's health investments

1.
Leibniz Institute of Agricultural Development in Transition Economies, Theodor-Lieser-Street 2, Halle (Saale), 06120
2.
Martin-Luther-University Halle-Wittenberg, Institute of Mathematics, Theodor-Lieser-Street 5, Halle (Saale), 06120

Received: August 31, 2014

Revised: July 31, 2015

Published: October 2015

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Abstract

Grossman's health investment model has been one of the most important developments in health economics. However, the model's derived demand function for medical care predicts the demand for medical care to increase if the individual's health status increases. Yet, empirical studies indicate the opposite relationship. Therefore, this study improves the informative value of the health investment model by introducing a reworked Grossman model, which assumes a more realistic Cobb-Douglas health investment function with decreasing returns to scale. Because we introduced uncertainty surrounding individual's health status the resulting dynamic utility maximization problem is tackled by optimal stochastic control theory.

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Mathematics Subject Classification: Primary: 93E20; Secondary: 92C50.

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