Financial health economics

Koijen, R and Philipson, T J and Uhlig, H (2016) Financial health economics. Econometrica, 84 (1). pp. 195-242. ISSN 1468-0262

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Official URL: https://www.econometricsociety.org/publications/ec...

Abstract

We provide a theoretical and empirical analysis of the link between financial and real health care markets. This link is important as financial returns drive investment in medical research and development (R&D), which, in turn, affects real spending growth. We document a “medical innovation premium” of 4–6% annually for equity returns of firms in the health care sector. We interpret this premium as compensating investors for government-induced profit risk, and we provide supportive evidence for this hypothesis through company filings and abnormal return patterns surrounding threats of government intervention. We quantify the implications of the premium for the growth in real health care spending by calibrating our model to match historical trends, predicting the share of gross domestic product (GDP) devoted to health care to be 32% in the long run. Policies that had removed government risk would have led to more than a doubling of medical R&D and would have increased the current share of health care spending by more than 3% of GDP.

Item Type: Article
Additional Information: © 2016 The Econometric Society
Subjects: I > Investment appraisal
F > Financial risk
H > Health service
Subject Areas: Finance
DOI: 10.3982/ECTA11182
Date Deposited: 26 Oct 2016 16:27
Last Modified: 26 Oct 2016 16:33
URI: http://lbsresearch.london.edu/id/eprint/574

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