Making the Grossman Model Stochastic: Investment in Health as a Stochastic Control Problem
Audrey Laporte, Brian Ferguson
It is well known that uncertainty is a key consideration in theoretical health economics analysis. The literature has shown that uncertainty is a multifaceted concept, with the individual’s optimal response depending on the formal nature of the uncertainty and the time horizon involved. This paper extends the literature by considering uncertainty with regards to the cumulative effect on health capital of on-going health behaviours. It uses techniques of stochastic optimal control to analyze uncertainty which can be represented as a Weiner process and shows how, in a Grossman health investment framework, the optimal lifetime health investment trajectory might be affected.