This paper investigates the long-run economic relationship between\ud health care expenditure and income in the US at a State level. Using\ud a panel of 49 US States followed over the period 1980-2004, we study\ud the non-stationarity and cointegration between health spending and in-\ud come, ultimately measuring income elasticity of health care. The tests\ud we adopt allow us to explicitly control for cross-section dependence and\ud unobserved heterogeneity. Speci cally, in our regression equations we as-\ud sume that the error is the sum of a multifactor structure and a spatial\ud autoregressive process, which capture global shocks and local spill overs\ud in health expenditure. Our results suggest that health care is a necessity\ud rather than a luxury, with an elasticity much smaller than that estimated\ud in other US studies. Further, we observe a signi cant spatial spill over,\ud though with a smaller intensity than that detected in other studies on\ud spatial concentration of US health spending. Our broad perspective of\ud cross section dependence as well as the methods used to capture it give\ud new insights on the debate over the relationship between health spending\ud and income
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