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Externalities in a life cycle model with endogenous survival

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Author Info

  • Kuhn, Michael
  • Wrzaczek, Stefan
  • Prskawetz, Alexia
  • Feichtinger, Gustav

Abstract

We study socially vs individually optimal life cycle allocations of consumption and health, when individual health care curbs own mortality but also has a spillover effect on other persons’ survival. Such spillovers arise, for instance, when health care activity at aggregate level triggers improvements in treatment through learning-by-doing (positive externality) or a deterioration in the quality of care through congestion (negative externality). We combine an age-structured optimal control model at population level with a conventional life cycle model to derive the social and private value of life. We then examine how individual incentives deviate from social incentives and how they can be aligned by way of a transfer scheme. The age-patterns of socially and individually optimal health expenditures and the transfer rate are derived. Numerical analysis illustrates the working of our model.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 47 (2011)
Issue (Month): 4-5 ()
Pages: 627-641

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Handle: RePEc:eee:mateco:v:47:y:2011:i:4:p:627-641

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Web page: http://www.elsevier.com/locate/jmateco

Related research

Keywords: Demand for health; Externality; Life cycle-model; Optimal control; Tax–subsidy; Value of life;

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References

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Citations

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Cited by:
  1. Kuhn, Michael & Wrzaczek, Stefan & Prskawetz, Alexia & Feichtinger, Gustav, 2012. "Optimal choice of health and retirement in a life-cycle model," ECON WPS - Vienna University of Technology Working Papers in Economic Theory and Policy 01/2012, Vienna University of Technology, Institute for Mathematical Methods in Economics, Research Group Economics (ECON).
  2. Bilal Barakat & Johannes Holler & Klaus Prettner & Julia Schuster, 2010. "The Impact of the Economic Crisis on Labour and Education in Europe," Working Papers 1006, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna.
  3. Strulik, Holger & Prettner, Klaus & Prskawetz, Alexia, 2010. "R\&D-based Growth in the Post-modern Era," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Leibniz Universität Hannover dp-457, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  4. Theresa Grafeneder-Weissteiner & Klaus Prettner, 2010. "Agglomeration processes in aging societies," Department of Economics Working Papers wuwp131, Vienna University of Economics, Department of Economics.
  5. Thomas Fent & Belinda Aparicio Diaz & Alexia Prskawetz, 2010. "Family Policies in the Context of Low Fertility and Social Structure," Working Papers 1102, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna.
  6. Klaus Prettner & Alexia Prskawetz, 2010. "Demographic Change in Models of Endogenous Economic Growth. A Survey," Working Papers 1008, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna.

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