ABSTRACT
Since Grossman published his groundbreaking piece on the concept of health capital in 1972 economists have applied the concept both theoretically and empirically with much success (Bercowitz et al., 1983; Karatzas, 1992, Picone et al. 1998). However, most authors have not made a clear distinction between “functional health” and health stock. The original paper by Grossman (1972) had assumed – largely for expediency – that “health services,” i.e., the benefits that arise from the health stock in each period and another term for “functional health,” is directly proportional to the stock of health. Henceforth, however, authors typically assume that a larger stock of health must imply a larger flow of health services. For example, Picone et al. (1998), uses health stock rather than functional health as an argument in the utility function in each period, which would not make sense unless in each period the service flow is directly proportional to the stock. Folland et al. (2010) are more explicit about the distinction between health stock and functional health, but are certainly mistaken in the statement that: “The greater one’s stock of health [is], the greater the number of healthy days, up to a natural maximum of 365 days [will be]” (p. 141). The assumption that flows are directly related to stocks is often correct, but as demonstrated below is not always true. The concept of functional health is not unfamiliar among researchers in the health sciences (Hornbrook and Goodman, 1996; Kington and Smith, 1997), but is seldom explicitly discussed in the economics literature. This chapter will fill this gap.
