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In this paper, we quantify the contributions of prices to explain cross-country differences in the health expenditure as a share of GDP and health status. To this end, we extend a general equilibrium framework à la Aiyagari (1994) by including health production Grossman (1972). The model relies on two wedges to explain health expenditures as a share of GDP and health status: (i) TFP wedge measuring the relative economic development, and (ii) health services wedge capturing the inefficiencies on the health service market. We estimate structural parameters as well as the country-specific structural wedges using a method of simulated moments approach on aggregate and micro data from eight countries. We find that dispersion in health prices seems to be the main cause for cross-country differences in health. These price differences come from inefficiencies in the health services sector and have sizable effect on welfare.
