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Optimal tax policy and expected longevity: a mean and variance utility approach

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  • Marie-Louise Leroux

    ()

  • Gregory Ponthiere

    ()

Abstract

This paper studies the normative problem of redistribution between agents who can influence their survival probability through private health spending, but who differ in their attitude towards the risks involved in the lotteries of life to be chosen. For that purpose, a two-period model is developed, where agents’ preferences on lotteries of life can be represented by a mean and variance utility function allowing, unlike the expected utility form, some sensitivity to what Allais (Econometrica 21(4), 503–546, 1953 ) calls the ‘dispersion of psychological values’. It is shown that if agents ignore the impact of health spending on the return of their savings, the decentralization of the first-best utilitarian optimum requires intergroup lump sum transfers and group-specific positive taxes on health spending. Under asymmetric information, a differentiated taxation across agents is still required, but subsidizing health spending may be optimal as a way to solve the incentive problem. Copyright Springer Science+Business Media, LLC 2009

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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 16 (2009)
Issue (Month): 4 (August)
Pages: 514-537

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Handle: RePEc:kap:itaxpf:v:16:y:2009:i:4:p:514-537

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: Longevity; Risk; Lotteries of life; Non-expected utility theory; Moments of utility theory; Disappointment; Health spending; D81; H21; I12; I18; J18;

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References

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  1. LEROUX, Marie-Louise, 2008. "Endogenous differential mortality, non monitored effort and optimal non linear taxation," CORE Discussion Papers 2008029, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Gary S. Becker & Tomas J. Philipson & Rodrigo R. Soares, 2005. "The Quantity and Quality of Life and the Evolution of World Inequality," American Economic Review, American Economic Association, vol. 95(1), pages 277-291, March.
  3. Eytan Sheshinski, 2007. "The Economic Theory of Annuities," Economics Books, Princeton University Press, edition 1, volume 1, number 8536.
  4. Tomas J. Philipson & Gary S. Becker, 1998. "Old-Age Longevity and Mortality-Contingent Claims," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 551-573, June.
  5. Frederick Mosteller & Philip Nogee, 1951. "An Experimental Measurement of Utility," Journal of Political Economy, University of Chicago Press, vol. 59, pages 371.
  6. Eytan Sheshinski, 2007. "Introduction to The Economic Theory of Annuities
    [The Economic Theory of Annuities]
    ," Introductory Chapters, Princeton University Press.
  7. Antoine Bommier, 2001. "Uncertain lifetime and intertemporal choice : risk aversion as a rationale for time discounting," Research Unit Working Papers 0108, Laboratoire d'Economie Appliquee, INRA.
  8. Broome, John, 2004. "Weighing Lives," OUP Catalogue, Oxford University Press, number 9780199243761.
  9. Loomes, Graham & Sugden, Robert, 1987. "Some implications of a more general form of regret theory," Journal of Economic Theory, Elsevier, vol. 41(2), pages 270-287, April.
  10. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
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Citations

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Cited by:
  1. PESTIEAU, Pierre & PONTHIERE, Grégory, 2012. "The public economics of increasing longevity," CORE Discussion Papers 2012005, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  2. Marie-Louise Leroux & Pierre Pestieau & Grégory Ponthière, 2008. "Should we subsidize longevity?," PSE Working Papers halshs-00586236, HAL.
  3. LEROUX, Marie - Louise & PONTHIERE, Grégory, 2009. "Wives, husbands and wheelchairs : Optimal tax policy under gender-specific health," CORE Discussion Papers 2009071, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Leroux, Marie-Louise & Ponthiere, Gregory, 2013. "Utilitarianism and unequal longevities: A remedy?," Economic Modelling, Elsevier, vol. 30(C), pages 888-899.
  5. Pierre Pestieau & Grégory Ponthiere, 2012. "On the Policy Implications of Changing Longevity," CESifo Working Paper Series 3926, CESifo Group Munich.
  6. repec:hal:wpaper:halshs-00575059 is not listed on IDEAS
  7. repec:hal:wpaper:halshs-00566858 is not listed on IDEAS
  8. repec:hal:wpaper:halshs-00586236 is not listed on IDEAS
  9. repec:hal:wpaper:halshs-00676492 is not listed on IDEAS

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